The RBI's gamble by cutting CRR by 50 basis points seems to have paid off with market closing today at more than a two-month high. The preference for a CRR cut or the portion of deposits that commercial banks need to keep with the central bank as opposed to further open market operations (OMOs) seems to reaffirm that it is shifting its focus from inflation.

YM Deosthalee, chairman and managing director of L&T Finance Holdings finds that the outcome of today's credit policy review is almost like a blessing in disguise for market and investors, as both can expect some amount of relief going ahead.
By cutting CRR, the RBI has immediately injected Rs 32,000 crore liquidity into the banking system while keeping the repo and reverse repo rates unchanged. "However, there could be some cascading effect due to extra liquidity," he adds.
While it is certain that this year's fiscal deficit target will not be met, what is worrying now is what the borrowing program will look like for next year. The government has raised its borrowing plan for the year twice to bridge the fiscal deficit, at a record Rs 5.14 trillion.

With such a huge government borrowing plan to bridge the fiscal deficit, Deosthalee says any announcement on fiscal consolidation could prompt the RBI to cut interest rates in the next credit policy.
Below is edited transcript of Deosthalee's interview with CNBC-TV18. Also watch the accompanying video.
Q: Give us an industries perspective and how you read the credit policy and your reactions to the CRR cut? The RBI seems to have indicated a shift in its priorities, now worried more about growth than the price situation that's clearly good news for industries is it not?

A: It is a great relief because we have witnessed in the last few months and especially last one year that there has been only one way it has been going. We were looking at only increase in interest rates and monetary tightening. So, this has come as a reasonably good relief.

The liquidity in the system was becoming very tight and banks were borrowing over Rs 1 lakh from the RBI, it needed some correction. With this 50 bps reduction in CRR, immediately Rs 32,000 crore will come into the system. There will be some cascading impact going forward, not immediately but maybe few months down the line. So, this is a good relief.
However the fact remains that RBI is rightfully concerned about inflation and there are issues on the inflation, oil prices and commodity prices other than oil have come down. They believe that there is suppressed inflation in coal and some of the commodities. There is also a issue on growth, there is a concern on the global slowdown and the overall growth expectations are coming down.India is now talking of 7%.

Credit off take is also somewhat subdued in the last one month or so. It is important that RBI is talking about growth as well as inflation together. So the signal which we are getting is mixed in the sense that there is a concern on growth, however to some extent they are worried about inflation, fiscal and current account deficit.
Q: Given the fact that the RBI is clearly worried about the resurgence of inflation, what is your expectation of the timing as far as the interest rate cut is concerned? Bankers don't seem to be anticipating one anytime soon, what is industries expectation now?

A: It is very difficult to predict, but it appears that if inflation continues to moderate and if RBI's inflation expectation of 7% by March is reached, then there is a possibility of a rate cut in the next policy announcement. However, there is a lot of talk about inflation in the policy and everything hinges around that.
One more important event which is going to be looked at is the budget and what are the pro-growth announcements in the budget. The overall stance of the budget is also going to be extremely important from the point of view of RBI. Therefore if there a fiscal consolidation in budget or there are some moves announced in terms of fiscal consolidation, then RBI will be much more lenient in looking at this aspect of interest rates. On balance, I do believe that in Q1 of next year there will be some softening of interest rates.

Q: Do you think the government is going to move and control expenditure upcoming budget. It needs political capital so that looks a bit unlikely but do you believe that perhaps they would even raise taxes in a bid to mop up revenues?
A: In terms of government expenditure there are two areas in which there is scope for reducing government expenditure. One of the largest items is subsidies and there is a need to look at some of the subsidies. I do believe that there will be some moves in that direction in the budget. One has to also consider the elections which are around the corner. The political fall out of announcements also has to be kept in mind, but considering the very delicate fiscal situation it may be useful - I do believe that the Finance Ministry will look at some of the steps of curtailing expenditure particularly in the area of subsides.

There is also a case for consolidating on tax front and some indirect taxes, levies may be introduced in the budget. There is possibility of mopping up higher taxes through service tax and income tax. So something is announced in this budget about increasing revenues of the government and subsidies, then the budget will definitely give good signals to the entire world. It will also strengthen RBI in terms of its policy stance.

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