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The Rediff Business Interview/Pramod Maskeri

'Stock markets will remain in a bearish grip till the Budget'

Mecklai Financial and Commercial Services Limited vice-president Pramod Maskeri spoke to Prasanna D Zore after the Reserve Bank of India announced its credit policy for the slack season.

What are your views on the slack season credit policy announced by RBI Governor Bimal Jalan?

It is important to view this credit policy in the context of the recent volatility in the foreign exchange market. Although we have seen the rupee stabilise in the last few months -- after the RBI introduced several measures on January 16, 1998 -- I think the apex bank is a little cautious. This is clearly reflected in its credit policy.

On the inflation front, the policy states it has to control inflation which has to viewed in the context of 17 per cent growth in money supply. On the other hand, there is the problem of slowdown in industrial growth. The comment that there is no room for complacency in regard to the forex market indicates that the bank is cautious.

Perhaps the RBI does not want an easier monetary policy to be taken as a signal for a weaker rupee. So, an attempt has been made to balance the divergent goals of exchange rate stability and controlling inflation while giving a fillip to the industrial sector and exports.

But the markets were reportedly expecting a cut of 100 to 200 basis points in the cash reserve ratio?

Right. But, given the present easy liquidity condition, a further CRR cut was not advisable. I think the RBI has done a good thing by reducing the bank rate by 1 per cent. This signals further lowering of domestic interest rates rather than infuse additional liquidity through CRR cuts. The RBI wants to check inflation without affecting the growth rate.

But a growth rate of 6 per cent, estimated by then RBI governor Dr C Rangarajan, seems to be a mirage?

True, the growth rate this year will be somewhere around 5 per cent. Now, whether the credit policy will achieve the targeted 6 to 7 per cent growth, is very debatable. However, you cannot judge the effectiveness of any policy just by market reactions. The market reaction, to a great extent, is based on its prior expectations. And they expect too much.

What has put brakes on the CRR reduction though inflation has been around 5 per cent, which is acceptable to the RBI?

As the RBI governor has said, the liquidity position is quite comfortable at present. Reducing the CRR further would have enhanced liquidity further and a consequent rise in money supply. Again concern for inflation remains top-most with the RBI. Besides, the RBI has more than Rs 85 billion as outstanding repos which it can sell as and when the situation warrants. In this background, I don't think there was any need for a CRR cut.

But tomorrow the Rs 40 billion auction may suck out some liquidity from the system.

Yes. But, as the RBI governor said, ''When the industrial growth picks up, call money market moves upwards.'' This may lead to a reduction in the CRR.

So it's a wait-and-watch policy...

Yes, it is possible. Even I thought the CRR would come down further. Or else, how will they ensure the success of government borrowing. I think they have taken this into account before deciding not to slash the CRR further. They know something which we don't.

In this scenario, how do you think the interest rates would align themselves?

Already the prime lending rates are 13.5 per cent or somewhere thereabouts. In fact, all the measures adopted by the RBI on January 16 to prop up the rupee have been reversed.

Bank rate was hiked from 9 to 11 per cent, then reduced to 10 per cent. And, after this credit policy, they stand again at 9 per cent. Back to square one. Although, this policy has not touched the CRR, it broadly mentions that they have a goal of further reducing the CRR in tune with the credit policy announced in October last by Dr Rangarajan.

Perhaps it is a wait-and-watch policy. Because I believe that exchange rate stability, like inflation, is an important parameter for the RBI. I don't think the RBI wants to sacrifice the rupee at the altar of lower interest rates.

So interest rates may not come down further...

Yes, but they will surely not go up. The RBI's endeavour would be to keep interest rates at the present level.

But what about the availability of cheaper credit which the market expected. Will it not hamper growth rate?

There is an interesting observation in the credit policy that domestic bank credit to the commercial sector has gone up by some 15 per cent. Despite this, the industrial production is not looking up. This means the money might have found its way into the stock markets. Some of it, though not all. Another possibility is that the money is being utilised to increase installed capacities which sounds a bit absurd in these recessionary times. The RBI should closely monitor the end-use of the funds loaned by banks to the commercial sector.

Why is industrial growth not looking up?

The slowdown may lie in parameters like the absence of a growth-oriented fiscal policy, infrastructural constraints, bureaucratic hassles. Now industrial growth cannot be achieved only by lowering interest rates. It may again lead to asset price inflation or consumer price inflation.

With foreign exchange deposits worth $ 26 billion, will the credit policy have any impact on the value of the rupee vis-a-vis the dollar?

In fact, as I said earlier, this policy is more cautious than what the markets expected. To that extent, the government and the RBI do not want a run on the rupee as witnessed in east Asian countries or even the sort of volatility which we witnessed in November 1997.

As for the value of the rupee, better indications will be available in the Budget to be presented on June 1. If the Budget sends right signals to the markets, promotes export and import-oriented incentives, there may not be any short-term depreciation in the rupee's value.

Nothing for the non-banking finance companies in this policy. Should this be a bit of a disappointment for them?

Well, perhaps, the RBI is once bitten twice shy after the CRB scam. The NBFCs should be happy that no further restrictions have been put on their operations.

Will the interest rate cut on pre-shipment rupee exports -- from 12 to 11 per cent -- bring better days for forex exporters?

Union Commerce Minister Ramakrishna Hegde's exim policy has already stated that export finance rates would be brought down.

What about the stock markets? Nothing on badla (forward trading) financing; the market crashed by 112 points on the day the credit policy was announced.

The fall may be a major correction that was overdue. By steering clear of badla, the credit policy might have proved a dampener for the stock markets. But the markets crashed more because of a technical correction. Remember the stock markets rallied about 1100 points since January? The correction began last week, from the peak of 4322.

I think the level of 3100 to 3800 will be a healthy sign before the Budget. There will be a technical correction ahead of the Budget. I think the stock markets will remain in a bearish grip till the Budget.

Interviews