New lending rate system will perhaps take 6 months or more to work: Deepak Shenoy

In an interview with Ashish Pandey of Zee Digital Convergance Limited, Deepak Shenoy, market expert and founder of Capital Mind, talks about the current fiscal scenario and effect of the recent RBI rate cut on the Indian economy.

Q1. To begin with, what’s your take on the recent 0.25 percent rate cut by the RBI? Do you think it was enough or you expected more just like certain sections of the market?

Deepak Shenoy: We expected 0.25 percent rate cut. We also saw an off chance of no cut because inflation at the core level is going up. Rates are anyhow coming down due to the Marginal cost based lending rate (MCLR ) regime starting on April 1. Either ways, the cut in rates to the general economy will be higher with the 0.25 percent cut.

Q2. In the bi-monthly Monetary Policy Review on April 5, the RBI maintained that liquidity is an issue. What is Your take?

Deepak Shenoy: Well, the issue is really the huge cash balances of the government which had complicated matters. With over 1.3 lakh crores being stored by the government at the RBI, the banks were short of liquidity and needed money for operations. The system has been in deficit for a while, with banks borrowing large amounts overnight from the RBI. The RBI's new policy is to give primary liquidity by buying bonds or dollars, rather than secondary or temporary liquidity like overnight borrowing. This should help banks in the short term, but in the medium term it will be negative for banks as they lose the easy margins they make from inefficient and deficit markets.

Q3. RBI has long complained that banks are not transmitting rate cuts to the borrowers. Days after RBI nudge, only two banks (SBI and ICICI) obliged with rate reduction. Do you see the MCLR system working?

Deepak Shenoy: It will take time to work - maybe 6 months or more. Banks haven't cut because government small savings rates were very high. Now that has been changed and MCLR means lending rates will fall alongside when borrowing rates fall.

Q4. Is the battle against inflation won by the government and the RBI?

Deepak Shenoy: I don't think so but the worst has been behind us. Food inflation will go up only if there is drought, and crude oil prices have been low for a while, so while that is the case, inflation won't be a huge problem. But core inflation is going up in the last few months, and it crosses 6 percent we could see a larger issue in the days forward.

Q5. What is an ideal rupee level in your mind?

Deepak Shenoy: There is no ideal level. The level will be always be changing like the price of potatoes. In general, the rupee weakens because India is a net importer and inflation here is at a high, compared to the west. But strong portfolio or FDI flows can reverse that entirely and make the rupee stronger at the same time!