The Reserve Bank of India's monetary policy continues to focus on liquidity, bringing with it a set of problems. Calling it an abundant liquidity policy, CSB Bank managing director and CEO CVR Rajendran says that, given the constraints, the RBI had no other option.
In an interview with Indianbankingnews.com Editor Manju AB, Rajendran elaborates on the implications of the policy for homebuyers, gold loans, inflation and non-banking financial companies (NBFCs). Amidst all this turmoil, banks are failing to put a price to risk, he points out.
The three words that the RBI often uses are appropriate liquidity, abundant liquidity and adequate liquidity. This is an abundant liquidity policy. There is so much money floating around, and the RBI is also buying dollars and further infusing money into the economy.
The system is slosh with funds. Though interest rates have fallen, the demand has not come back into the market. A lot of money is coming into the banks, but credit is not growing. Demand for credit is yet to pick up despite historically low interest rates as the engine for credit growth - the economic growth - is yet to pick up, though we have a lot of green shoots around. Because of this, there is more than Rs 8 trillion liquidity surplus in the economy.
One worry is that risk is not priced properly. Huge liquidity surplus has brought down the rates, but pricing has gone haywire. Worry is that all the bad loans may get originated at such a time when money is available at very cheap prices. Banks are unable to put risk premiums and pass on the cost of capital to pricing. The monetary transmission is happening fast, but the risk is not priced in. This will not augur well in the long run.
Yeah, they are pricing it right because they do not get the capital from the government. Public sector banks (PSBs) due to various compulsions are following a risk agnostic pricing. It may not be beneficial in the long run for not only for the PSBs but for the system at large.
Take the case of gold loan where the operational costs are high at 4.5-5%, but many of the PSBs have priced it at 7%. If you take cost of funds and credit cost, this works on negative spread. Those who are jumping into the price war are getting into trouble.
Housing loan rates are another case in point. It is at 6.5%-7% for a 30-year housing loan. You cannot give it at these rates. It is a 30-year risk. Why will I grant a housing loan at this rate when a government bond is available at the same rate?
Yes, they can hike the rates, but there are limitations. Homebuyers are comfortable with a certain EMI amount, and if it goes too high, they will be unable to service the loans. You cannot jack it up beyond certain level. Elongation of the loan beyond 30 years is a higher risk for the bank.
I think RBI has done the balancing act since we are technically in recession but inflation is much above the comfortable level - it is worse than stagflation, 'recessflation'. I think the ball is not in RBI's court but we need the animal spirits of enterprise to be back in the economy so that there is a surge in demand in credit for bankable projects.
Much will depend on the economic recovery. RBI also has to maintain an eye on cost of borrowing of central government as any move to suck liquidity will cause the G Sec yields to go up. It is a tough choice.
In today's time, the RBI is right in overlooking inflation in order to stabilise growth. Once growth is back, it will address inflation if CPI numbers don't behave as expected.
The government cannot do anything beyond a point. Now all the markets have opened up. Earlier, the state governments had shut the main markets, but now markets are all open. Even states are saying you will have to take care of yourself. All over the world governments are doing the same. A government cannot close down everything forever.
With supply logistic restrictions now fully lifted and combined with good agriculture growth, there should be some respite in CPI food inflation. This is reflected in RBI's projection for Q4FY21. RBI has projected 5.8% CPI for March 2021 while the October number was 7.6%. Given the base, CPI Index number needs to come down from 158.4 of Oct to 157.3.
Thus, I will prefer to be optimistic with RBI that the inflation will ease with easing of supply bottlenecks and due to the effect of bumper crops.
CPI is running ahead. Of course, there is a seasonal component which will get corrected once supply bottlenecks are removed. But there can be a permanent portion as well, which the monetary policy has to address. Now the depositors are getting a negative real interest rate.
Banks are not having the opportunity to deploy credit, but are offering a rate up to 5% which they deploy in the reverse repo @ 3.35%. Depreciation of the currency happens faster than the fall in interest rates. So this has to be corrected.
Perhaps this can be reversed when growth picks up. So we get back again to growth as the answer.
Now growth is visible in many sectors. If growth comes back, the interest rates will probably reverse. The infrastructure sector is growing because of government spending. The roads segment is seeing growth. In the power sector, solar energy is growing.
The real estate sector is looking up in cities like Hyderabad, Bangalore and Pune. Mumbai, Delhi, and Chennai are struggling because property prices are higher and unsold inventory is high. But on the whole, real estate seems to be coming back. Home loan sanctions are improving, which is what most banks are indicating. NRIs are taking out loans to buy properties.
The existing stock needs to be sold off. Only then will the real estate companies have some relief. However, people are buying where the pricing is realistic. The real estate companies have brought down the prices in many markets.
The auto sector is doing well because many people are preferring their own vehicles to public transportation. They are either buying new or old vehicles.
When agriculture does well, the country will do well. That has been our experience all along. The CPI is going up as prices of agricultural products, milk, meat and eggs are going up. If farmers get better prices, the agriculture sector will do well. If farmers have more surplus the sale of FMCGs, white goods, tractors and vehicles will go up. That is the hope all of us live with.
The software companies have come back to full capacity. Many state and central governments are offering job opportunities. We see a lot of advertisements. With the return of migrant labour, construction activities are on.
The laggard will be the 'trade, hotels, transport, communications & broadcasting' segment of services sector, which has been a major driver of GDP in the past. Also, public administration, defence and other services which had contracted by 12.2% in Q2FY 21 needs to go up. The ball here is entirely on government's court.
Banks form the primary source of funds for NBFCs. Take any NBFC and its maximum borrowing will be from the banking sector. Hence RBI is now saying that, since they have access to public money, they need to be controlled with the same rigour as applicable to the banks.
But for the protein inflation part which may be viewed as demand pull, bulk of the driver of inflation remains cost push factors which are more or less transient in nature. Growth seems to be largely broad based and Q1FY 22 is likely to demonstrate a big bounce back.
