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Expect rate cuts to continue once inflation comes down: PK Gupta, SBI

The banks have done most of the transmission and the remaining will happen in the coming months.

ET Now|
Dec 05, 2019, 02.22 PM IST
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The core inflation hikes seem to have tilted the balance in favour of no rate cut in this policy, says PK Gupta, MD, SBI in the RBI monetary policy. Excerpts from an interview with ETNOW.

While everybody was looking at a 25 bps rate cut today, RBI delivered a shocker by pausing rate cuts. The view from the governor seems to be it is better to pause at this point of time and see what the government is going to do going forward in the Budget. Are you satisfied by the explanation that has been given today?
The expectations were mainly built by the market for a rate cut based on the previous policy actions by the MPC for the last many months. Since the MPC had been taking a dovish stand, people expected a rate cut this time too. But, at the same time,inflation had spiked to 4.62% and as per the MPC estimate, it is expected to spike further up to 5.1% in the period up to March 2020.

As the governor said, since one of the major objectives of the MPC is to target inflation, they felt that even though it is within their target of plus minus 2% from 4%, may be the time is not right to cut the rates further.

Second, as the governor explained, they are looking at the full transmission of whatever cuts have happened so far to take place. The policy clearly states that there is space for further rate cuts and that may happen but at present, the core inflation hikes seem to have tilted the balance in favour of no rate cut in this policy. We do expect that the rate cuts will happen once the inflation numbers come down.

The IIP numbers were negative. The growth numbers were a little lower for Q2 and that had been building up the expectations, but I do not think it is the end of the cycle for rate cuts. The rate cuts may happen but I think we are now seeing is a bit of a pause in the rate cut cycle.

The governor made the point that 40 bps of rate transmission has already happened and he wants the cumulative rates to be transmitted into the economy. Do you sense that confidence is coming back and banks and lending institutions will pass on the rate cuts and they will translate to lending rate cuts?
As he said, a significant portion of the transmission has already happened. All the personal floating rate products as well as the home loans are linked directly with the repo rate as far as we are concerned. For us, whatever rate cut had already happened, the benefit would get passed on from January 1. The transmission is happening in a big way. The MCLR transmission is something where the transmission does happen with a bit of a lag.

As far as money markets are concerned, the full transmission has already happened for products which are linked with the repo rate. The MCLR transmission does take a little bit of time. There are rigidities that are built into the system. For example, for a bank like SBI we have almost 45% CASA ratio. Now on the CASA ratio we did try to link our savings bank rate with the repo rate. Obviously, there are limitations in terms of how much low the savings bank rates can go.

On the current account balances, the interest rates do not make any difference whatsoever. Even when we cut deposit rates, the entire transmission in terms of the lending rates will not happen because of the way MCLR is calculated. So, even though the banks are blamed for the transmission not happening, if you look at the terms of the way MCLR rates are calculated, the banks have done most of the transmission and the remaining will happen in the coming months.

What do you make of the RBI slashing their full year GDP growth forecast from 6.1% to 5%?
SBI’s internal economic research department also had revised their GDP forecast to somewhere close to what the RBI is projecting now. There is some concern which is coming out of the second quarter GDP growth numbers also. But a lot of steps have been taken by the government and we believe the impacts shall start coming in. Starting with the corporate rate cuts, financing for NBFCs, there are a lot of other things which the government has done. The impact of that will take a little bit of time but growth is a concern area for the whole economy. I assume all these steps will lead to the growth revival. It is a question of time.

Would you say that given the kind of economic backdrop that we are in, government spending is going to be a very critical route?
The government is committed to keeping the spending within the fiscal target. The government has been mobilising a lot of resources. I assume some changes will happen in GST . The fund transfers which have happened from RBI to the government will happen. A lot of action is happening on the disinvestment side also. We have seen quite a bit of action where even the fund has been announced by the government.

All of these actions will lead to the government being able to manage the fiscal deficit. Government spending is a very significant portion of the overall investment in the economy. That will continue and the government will be able to find resources to fund that investment.

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