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A 'no surprise, 'main hoon na' policy from RBI: Nilesh Shah

“RBI is like a batsman batting on a fifth day pitch against a hostile bowling side. There are a few misses but overall they have not lost the wicket. They have kept the scoreboard ticking and that is giving confidence to the market that we are in safe hands. Undoubtedly, there is a global storm blowing and there will be some impact on us,” says

Nilesh Shah, MD, Kotak AMC.

It seems the market is seeing some amount of relief. The Governor has said exactly what was expected and we are at the high point of the day!
This was a ‘no surprise; policy, a kind of main hoon na (Don't worry! I am here) policy where RBI is saying that there is a global storm blowing but we will be proactive in our approach. We will be data driven and will continue to juggle between growth, inflation and financial stability. RBI is like a batsman batting on a fifth day pitch against a hostile bowling side. There are a few misses but overall they have not lost the wicket. They have kept the scoreboard ticking and that is giving confidence to the market that we are in safe hands. Undoubtedly, there is a global storm blowing and there will be some impact on us.

The governor was very confident that we have enough liquidity. Liquidity is still in surplus even though there were contradictory reports from the market. The Governor was very sure that it is still in surplus and he also said that they are going to shift to a single 14-day VRRR. What impact will this have on the liquidity front?
When the governor is talking about liquidity, he is talking about total liquidity which includes balances with the government, which includes balances in the VRRR and also daily overnight liquidity. When the market is saying daily liquidity was negative for one or two days, that was only the overnight liquidity. So both statements are true.

The market is focussed on one component of total liquidity. The honourable governor was talking about the total liquidity. We do have some disparity where banking liquidity moves to the government through GST collection or through advance tax payments and it takes a little bit of time to come back to the system.

As long as those patches can be evened out, liquidity remaining in surplus on totality will be good enough for the market to operate in. The short end of the yield curve has gone up a little bit, partly driven by systematic drawdown of liquidity and has come down from about Rs 10 lakh crore to Rs 4 lakh crore, partly driven by this 50 basis point rate hike. But at this point of time, we believe the yield curve is pricing in a repo rate of around 6.25% to 6.5%.Hopefully we will be somewhere around there unless and until there is a global shock.

In 2015 or 2016, banks made a very similar request to the Reserve Bank of India and I remember the then Deputy Governor Viral Acharya was very dismissive of that demand saying that we cannot allow this and subsequently the RBI had to do an about turn and allow that relaxation to happen. Do you think banks have a stronger case, will RBI again do an about turn and accept this very justifiable demand of banks?
So in 2015-16, the banks demand was very well justified because there was remonetisation and all the liquidity moved into the banking system. RBI did not take that excess liquidity from the banking system and it got parked in the government securities market at much lower yield than normal and when the liquidity was taken out as new currency notes were printed, the yields went back to normalcy.

Now for that abnormal period, there was a need to provide relaxation which fortunately RBI provided later on. Our recommendation will be to take a decision based on the evolving situation. Today consensus seems to be emerging that global central banks will keep on raising rates, especially in the US to control inflation and once inflation is under control, they may resort back to rate cutting.

Before the previous Fed policy meeting, the expectation was that rate hike will be till December 22 and rate cut season will begin in mid 23. Post this Fed policy meeting now expectation is that there will be rate hike in early 23 and rate cuts probably will be in 2024.

Now, if the gap between rate hike and rate cut cycle is going to be six or nine months, then maybe it makes sense for RBI to give relaxation to the banks rather than incur mark to market losses. If the rate hike to rate cut cycle is going to get prolonged and the elevated yields are going to remain for a longer period of time. Probably RBI should not provide relaxation.

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