What are your thoughts on RBI policy outcome?
The impact of Russia-Ukraine situation on crude, metal, and food prices could not have been controlled by monetary policy. Our raising of interest rate is unlikely to impact crude oil prices but clearly RBI is now focussing on inflation away from growth. Monetary policy stance has moved from accommodative to withdrawal of accommodation and RBI still has to juggle the issuance of net borrowing programme which has material impact on secondary market yields. Anyways, it is like batting on a fifth day pitch where balls are shooting all across. RBI has done whatever is best possible by balancing between inflation and growth.
Can the rate hike hurt demand and credit growth for banks?
That is a million dollar question. We have seen some amount of softness in demand in the month of May, depending upon which corporate we spoke to. There is an uneven recovery where high-end SUVs have waiting period of up to a year and low-end entry bikes are in no demand and inventories have reached probably up to 60 days. So in the uneven recovery, softness in consumption demand, capacity utilisation is clearly struggling. There will be an impact of higher interest rates on the demand side. More importantly, I believe 40% of loans are now linked to repo rate and there will be instant transfer or instant transmission of interest rates hike. So we will have to carefully watch how this interest rate hike subdues the demand which was already on the softer side in May.
Now that we have seen bond yields cross 7.5% mark, what will RBI do if hypothetically yields were to go to 7.6-7.7%. Will they then be forced to back track and try supporting bond yields once again?
Undoubtedly, the size of the borrowing programme, at more than Rs 11 trillion, is beyond the comfort zone of the market. Last year, we had seen participation via G-Sec programme and this year also market is expecting that there will be some sort of support from the RBI. Now clearly, if RBI supports the programme and then liquidity goes up, that will have negative impact on their inflation control mechanism. So they really have to cross a very very fine line. They were looking forward to some sort of forex outflow which reduces liquidity. There could be some luck by way of lower commodity and oil prices. Fortunately, we have seen correction in metal prices. The most important commodity which we watch is crude and that has not corrected. In fact, it has gone up. So RBI needs a little bit of luck to ensure that the borrowing programme passes without disruption.