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RBI hikes reflective of past inflation and potential future trajectory: Nilesh Shah, Kotak AMC


The credit growth from here onwards will be a function of how do PCA banks channelise their surplus into credit, Nilesh Shah, MD, Kotak AMC, tells ET Now, talking about the RBI credit policy.

Edited excerpts:
RBI has carried out a second consecutive repo rate hike, but the stance continues to be neutral. What is your view?

Clearly the stance is more about the future and where RBI is indirectly indicating that drop in inflation trajectory. In our opinion, 5% number was the peak and due to base effect and good monsoon from here onwards, the prices will come down. Obviously, it is subject to MSP revisions which will get impacted and the two hikes are function of the past inflation number. The trajectory of inflation has been revised from 4.7% for second half to 4.8% but the last two numbers were above that trajectory — around 5%. My guess is that hikes are reflective of past inflation and neutral stance and to some extent is reflective of potential future trajectory.

The market had pretty much priced in another 25 bps hike. But even so, what does this mean for lending as far as banks go over the course of the next two to three quarters because it just seemed like appetite was coming back.

Undoubtedly, there is credit appetite coming especially from small and medium enterprises. More importantly, this is quite a polarised market as 11 out of 21 PSU banks are under PCA. They cannot give credit beyond triple A rated clients.

Six out of the remaining ten banks are under voluntary PCA. They are also not extending credit because their financials are more or less bringing them back into PCA. So 16 out of 21 PSU banks are not extending credit to all sets of clientele and that burden is shared by other banks, private sector banks and NBFC.

More importantly, these 16 banks liquidity is focussed more towards shorter ending repo whereas the overall system is deficient at about Rs 40,000 crore. The credit growth from here onwards will be a function of how does PCA bank channelise their surplus into credit.

Second, how does overall liquidity improves in the system. We cannot expect double digit credit growth with overall system at Rs 40,000 crore negative from a liquidity point of view.

Third, how do we channelise credit to the needy sector of economy because clearly there will be geographical as well as KYC limitations of clients. So, there is a challenge on the credit side of the economy despite the 12.8% YoY growth that growth is probably coming on a smaller base but we need to ensure that credit is available to all segment of corporate India.

Enough has been written and said about core inflation. That was a big concern before the policy. At 6.3%, excluding food and fuel, core inflation does not present a very pretty picture. It has been going up consistently about 0.5% point every quarter and yet the RBI in its statement very categorically says that core is not really a problem legislatively. We have to target CPI, the headline inflation at 4%. Is there some sort of a distance between what they are saying and what they actually want to achieve?

This is a structural issue. While mandating RBI to manage inflation we focussed on headline inflation rather than developed market practice of core inflation. Clearly, the food prices are more determined by supply side pressure. Fuel prices are driven by global factors but for a variety of reasons, the government probably thought it appropriate to push headline inflation for inflation targeting and I am sure over a period of time there will be debate about this and at some point of time, like developed market we will have mandate to manage core inflation.

But this also raises another point; are we calculating our inflation correctly? Clearly RBI has been stripping out HRA impact of state pay commissions because in some sense there is circular reference between HRA allowances of government employees which gets a proxy for housing inflation. We need to continuously improve our inflation measurement and at some point of time, align our practice of targeting inflation with core inflation rather than headline inflation. But till such time, RBI has no option but to go and do the job as has been legislated to them.

The RBI commentary and also this assessment that has been given to us categorically states that output gap is narrowing, capacity utilisation is rising, we will see perhaps demand go up. In fact, the survey of the manufacturing companies also show input prices hardening. What does all of this mean for economic activity put together and for growth eventually?

So far, all the results which we have received this quarter clearly shows volume expansion and margin expansion in certain counters. The output gap might be narrowing down more in consumption related sectors like automobiles, FMCG and consumer durables. But this is not reflected into order book for capital goods intermediaries.

The capital goods companies are still not showing order growth. One of the largest capital goods company had order book growth of just 3% year-on-year. Clearly there is something which is restricting investments by entrepreneurs, it could be ease of doing business, it could be high real interest rates, it could be dumping by China, it could be election. But there is something which is restricting investment activity at private sector level, despite capacity utilisation inching up and output gap narrowing.

This is obviously not hawkish with a pause, this is not dovish with a hike because too many things have been explained on what are the risks to inflation. What would you call this policy eventually?

I will duck that answer but I just want to raise one additional point about the governments borrowing programme in the second half. This will be the second half where festival season demand will pick up. Second, this will be the season where your liquidity will be tight because of the festival season, the supply pressure with or without fiscal slippage will also emerge. In the first half, this time the borrowing has been at a little lower paced and most importantly there will be election related uncertainty.

Apart from all the economic factors, the pure demand supply equation of gilt. also will have an impact on the market yield levels and that is something which will have to managed very carefully.

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