Room for rate cuts, inflation to be lower in 2021: BoA | Economic Times

India still has room for further interest rate cuts as inflation is likely to be lower in the first two quarters of the next calendar year, said Jayesh Mehta, country treasurer at Bank of America. Higher inflation is a temporary phenomenon, reflecting the pandemic-induced supply shock, Mehta tells Saikat Das and MC Govardhan Rangan. Edited excerpts:Where are the interest rates headed?We believe there is still some room for rate cuts despite the fact that there might be some temporary disruptions due to higher food and fuel inflation. We see at least 50 basis points drop in benchmark yields and 25 basis points fall in the repo rate. The main reason being, inflation is going to be lower in the first and second quarters of 2021.What should be the message from the Reserve Bank of India (RBI) to the market after the benchmark bond devolved four times?The market expects RBI to come out with some sort of rationale for its policy decisions to comfort market participants who are otherwise making their own interpretations. In these uncertain times, it’s best for the RBI to provide clarity.If we do not see some support from the RBI ahead of the policy meeting, then yields may start inching up.What are the various interpretations of the market?While the governor has given indications about yield movement, the MPC has hinted about rising inflation. If the focus is going to be on inflation, the situation will remain challenging as food prices are rising globally. A school of thought suggests, for the time being, may be, the RBI should stay away from inflation targeting.Will inflation cool off?The current higher inflation is a result of supply side disruption with a higher weightage for food and fuel CPI. After December, we expect inflation should fall substantially, particularly in Q1 2021.Between inflation and fiscal deficit, which one is a bigger worry?Inflation is more about where the policy rate should be, and fiscal deficit does not matter beyond a point. We must understand that the market has a limited capacity. It has a limited appetite. If borrowing goes above a particular level, then it has to be monetised.When do you expect credit growth to pick up?Not immediately. Many companies and individuals are struggling with their existing credit. At this juncture, unless the business confidence comes back, it is unrealistic to expect capex to begin. In absence of the usual business, companies are borrowing more for working capital. Hence, credit growth is unlikely to pick up in the current year.Do banks have any role to push credit expansion?Banks will have to be proactive and flexible while extending the credit limits of good quality borrowers. Of course, they must take into consideration credit risk and follow all the rules and regulations while expanding credit lines.What transpires out of the latest restructuring plan?The loan restructuring is a completely different aspect where banks need some hand-holding. One cannot blame corporates for the restructuring because it’s happening due to the pandemic induced economic crisis.However, some industries can legitimately qualify for the re-cast, which is a different case altogether.What needs to be done to revive the economy?First, a lower interest rate is crucial for growth and will help people survive in the aftermath of the pandemic. Hence, a rate cut and its timely transmission are needed.Second is credit. Banks need to be a bit liberal in terms of credit assessments. Companies are uncertain about their own future and are unable to provide business projections. In such a situation, lenders need to trust brands with which they have been doing business for a long time and accordingly extend credit.There is surplus liquidity. What effect will it have especially when credit demand is poor?Surplus liquidity is bad when the credit growth is expanding because it impacts inflation. However, as of now, that is not the case (of credit growth).More importantly, surplus liquidity builds risk appetite. If you have surplus liquidity with deployment issues then you don’t mind going down the credit curve. That is how the credit risk appetite is built.Where do you see the rupee?With dollar weakening, overseas flows have been coming into India. However, the dollar weakness seems to be fading now. Unless there is clarity on the pandemic, we have to live with uncertainties. In such a situation, the rupee is likely to remain volatile for at least three months from here.Where do you see RBI standing as a central bank among its peers?The RBI governor is quite clear about targeting inflation while supporting growth. Sometimes, operational challenges may come in terms of the “timing”, as observed over the last few months or so.If we look outside of India – look at Indonesia where 50 percent of the country’s borrowing has been lapped up by its central bank. The RBI hasn’t bought even 5 percent of India’s borrowing. Similar is the situation with a lot of central banks around the world and hence, we believe, RBI is doing the right thing.Is the recent criticism of the RBI from market participants justified?We believe the criticism is unfair just because the RBI is doing OMOs citing surplus liquidity. We seldom hear such voices when other central banks openly support government borrowing programmes to manage yields.The RBI should continue doing what it feels is right, and support the government borrowing programme.