Arup Rakshit, Group Head of Treasury at HDFC Bank, agrees with Sahay that the Reserve Bank of India (RBI) needs to do more than just cut interest rates, as the falling rupee could harm growth.
The Indian rupee hit a record low on January 13, breaching the 86.50/$ mark, making it the worst-performing major currency globally.
This is the verbatim transcript of the interview.
Q: You have already put out a report saying no rate cut, but a cash reserve ratio (CRR) cut in February.
Sahay: At this point when we are looking at the February Monetary Policy Committee (MPC) meeting, the priority has to be INR liquidity infusion. The repo rate cut will not make a difference, if INR liquidity by the end of March 2025, is at ₹2-2.5 lakh crore if you are looking at the headline. We estimate that durable liquidity, because of seasonal patterns, etc., can move to ₹1-1.5 half lakh crore of the deficit by the end of March 2025.
So, giving a repo rate cut does not meet the requirement of the banking system, and will not help in transmission. So, a CRR (cash reserve ratio) cut of 50 basis points is our call for the February meeting, and it is just one part of the problem. The size of the liquidity deficit is very large. So, we hope we see a complete package in terms of say, a buy-sell swap or even a long-term repo operations (LTRO). a lot more needs to be done before a repo rate cut is delivered.
Q: My prime problem is not RBI keeping liquidity tight by design. Isn’t there a fear that plentiful liquidity could also mean that the rupee fall may be more exacerbated for the same reason why you do not want a rate cut? Maybe the RBI is keeping liquidity tight to keep the rupee from falling too much.
Rakshit: I am not sure whether that is the thought because of which the rupee liquidity has tightened. The basic fact is, the way things are going about, you need that rupee liquidity, otherwise the growth is going to get impacted. I mean, the first half growth was 6.4 there was an expectation that the second half would be more towards 6.7 but with this kind of rupee liquidity, that is not going to happen.
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Now, the way government balances have been started to be released, it has moved to a just-in-time technology from a government balances perspective, so that is also impacting – that would additionally be used to add the liquidity into the system. So, I agree with Sahay that RBI needs to do a lot more.
Q: A lot of people are talking about open market operations (OMO) purchases of bonds and CRR cuts. Do you think an LTRO also is called for? Is it that tight?
Rakshit: It is tight. So, let’s see which are operations, they go about. There is an OMO, which they will address. So, let’s see.
Q: What are you expecting in terms of the 10-year bond?
Sahay: For the report cut view, given that globally and in the US for specific, we are still pencilling in almost 75 basis points of rate cut between 25 and 26. We see room for 50 basis points of rate cut by the RBI between April and June.
Our sense is this is needed because there is a moderation in economic activity domestically. And if this is delivered, then on a 12-month basis, it can provide a relief of 0.15% of gross domestic product (GDP) to the mortgage loan borrowers, having said that the key risks, which we will have to keep in mind are, what if US data continues to surprise on the upside, and what if the US Federal Reserve starts hiking? I think if the Fed pauses, we still have room to cut rates.
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Q: Do you think that a rate cut is now very difficult for the RBI, despite the softness we saw in last month’s data? Secondly, I am once again asking you this question, is the RBI not that liberal with liquidity because that also can push the dollar higher? Is there a fear that let me keep the rupee tight so that you guys want the rupee and you keep those interest rates high enough to prevent too much rupee depreciation?
Rakshit: They will have to balance the two out. I take your point that whether they are concerned about that or not, they will have to balance the two out. To answer your first part of the question, whether they will have a cut. I completely agree with Sahay that the February cut is not foreseen at all.
The earliest is April, but it has to be seen how the US Fed is doing it. If there is any chance of a Fed hike, we will not cut immediately. So, 75 bps is also what we are saying in the next fiscal that the repo cut will happen. But the challenges are how the US Fed behaves and how the tariff barrier plays out.
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