From liquidity provision point of view, RBI decision is a welcome move: K Harihar, First Rand Bank

In an interview with ET Now, K Harihar, Treasurer, First Rand Bank Ltd, says that going ahead the inflation may stabilise in the 7-7.5 range, which will give space to the RBI cut the rates a little bit more. Excerpts:

ET Now: What is your opinion on the RBI’s move and what does this do to the overall liquidity situation?

K Harihar: We were expecting a liquidity shortfall of about Rs 75,000 crore to Rs 1 lakh crore by this month end after the full impact of the tax outflows. Therefore, from a liquidity provision point of view, this is a very welcome move. That liquidity provision now-a-days is driving interest rates is clearly evidenced by the fact that when they announced export refinance window, even with the old rate of 8%, you saw the market rates actually coming down. When I say market rates, I mean the commercial paper rate and the certificate of deposit rates -- they have all come down. And in today’s world the way base rate is calculated, you actually need the cost of deposits of a bank to come down. Therefore, unlike the PLR which is more a forward-looking view, the base rate is an actual calculation.

Therefore, you need the deposit rates to go down and that can only drive a real move down for the base rate. From that point of view, a CRR cut is a very welcome one, and it keeps open all the possibilities as we go forward in future.

ET Now: With the inflation reading on the high end of the range of 7.5%, will inflation management continue to be a problem? What are the targets that you are looking at with respect to inflation reading?

K Harihar: Overall we are probably seeing an up-down situation still. In the short term maybe inflation will go up a little bit more, but we still see it in the 7.25-7.50 range by the end of the year.
If you look at the global and the local situations, it is now increasing clear that the drought that was hitting large parts of Midwest America, etc. is not as bad. The wheat production has not been too bad. Corn prices have stabilised and even in India, the late rains are going to make sure it will not be a bad situation as far as the production is concerned. Also, the rupee is staging a phenomenal recovery and for a country which imports about $40 billion plus per month, this is going to be a phenomenal advantage in terms of pushing the inflation.

We also continue to be positive on the fact that going ahead, inflation will not collapse, but will stabilise in the 7-7.5 range and give space to cut the rates a little bit more.