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While liquidity concerns persist, he noted that the RBI has begun infusing liquidity into the system, with the possibility of further action.
Prasanna also forecasted a limited rate cut cycle ahead and projected the rupee could weaken to 85.5 against the dollar by December 2024.
This is the edited excerpt of the interview.
Q: How have you read the MPC minutes, is there something positive for banks here?
A: The minutes can be classified as the dovish set of minutes, not least because of the fact that there were anyway two external members who dissented and who voted for a rate cut. If you look at their minutes, it seems to indicate that they will probably vote for a cut in February as well. Beyond that, if you look at the persons who actually held the rates, amongst the external members, he has also spoken about the need to spur growth and the fact that it was a very close call. It looks like the third external member is also looking very close to flip around to maybe a rate cut in February.
The interesting thing is, what’s going to happen to the RBI members, and even amongst the RBI members, at least as far as the previous minutes are concerned, you had one member really talking about the need to cut rates, I mean, you need to pivot at the right time, and you need to cut rates as we go ahead if inflation comes down.
Both the ex-governor and the deputy governor not going to be there for the next time around so it’s a big call as to the new members are going to be saying. Net-net, I would say that the minutes, was dovish.
Read Here | RBI MPC Minutes: Economic slowdown warrants rate cut, argue two members
Q: A word on how do you see liquidity in the Indian market? Bank index is the best performing index at 1.2% higher compared to any other sector. Are you all sensing that liquidity will be plentiful because the rate cut is actually bank negative in the initial stages? What are you drawing positive?
A: From a system perspective, I think liquidity is not looking too good, frankly. I think the cash reserve ratio (CRR) cut was only offsetting the kind of liquidity tightness that have happened over the last two months or so. In fact, in the last two months, you have seen core liquidity drop from around ₹4 lakh crore to something around ₹65,000 crore as we speak. This is due to a combination of FPI outflows. Then there is a redemption of government bonds, and then there is currency in circulation (CIC) leakage. So the reduction in liquidity, core liquidity, has already happened, and RBI is partially offsetting it by CRR cut.
Going forward also, unfortunately, the currency leakage is only going to increase in quarter four, because that time when typically around ₹1.25 to 1.5 lakh crore of cash goes out of the system. So from that perspective, and even if you assume FPI flows is not an outflow, and even if they remain neutral, it basically means that the core liquidity will be down to something like a flat numbers to around zero by end of March, even after you take into account the CRR cut that has been infused.
Net-net, the RBI has started a process of liquidity infusion, and we feel that if the FPI outflow, or even if inflows do not happen, then we are pretty sure that we are going to see more liquidity action from the Reserve Bank. The key question is, what kind of actions are they going to take?
Q: Number of cuts you expect and rupee range?
A: We think it’s a 50-basis point shallow rate cut cycle, which is two 25 basis point rate cuts. The rupee range is we have to prepare ourselves for a depreciating rupee. We do think that it’s going to go to around 85.5 by end of this financial year end, and possibly towards 86 or 86.50 towards December.
Of course, there will be periods when the dollar will reverse its strength globally, because it has moved a lot, and then you could see a lot of bullishness in emerging markets but at that time, RBI will be intervening to protect the rupee from appreciating much, because they have to recoup all the reserves that they have lost. So the view is appreciation limited, because RBI will be there, and depreciation, they have to let it go as Yuan and other currencies depreciate.
For full interview, watch accompanying video
Also Read | RBI’s MPC sees food inflation softening in Q4, warns of external risks
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