RBI MPC may cut repo rate by 25 bps in April, Keki Mistry says

Do you see RBI cutting repo rate this week? Will the regulator maintain liquidity in surplus?

My personal view is that the RBI will cut repo rate by 25 bps in the April MPC meeting, and another 25 bps in the current calendar year. The RBI will likely continue to ensure that the banking system, without being excessively liquid, is certainly not running into deficit. They will likely keep a neutral to a positive bias as far as liquidity is considered.

But to take a view on this for 6-12 months is very difficult because it is going to depend on various factors. I don’t expect inflationary pressure in the coming few months, but if geo-political volatility persists, causing global inflation, then we will have to wait.

We have seen some moderation in credit growth across segments. What is your view on housing sector credit growth?

Housing is such an important asset for a household, yet the penetration level of mortgages in India remains extremely low, as reflected in the mortgage-to-GDP ratio. India’s ratio is less than 12 per cent, while China is in the mid-20s, and majority of the western economies have at least 40 -80 per cent ratio. Based on this fact, I believe the demand for housing and housing finance will continue for decades. There will be bumps along the way, but never look at quarters, look at the long-term picture.

Two-thirds of our population is below 35 years of age and over the next 10-20 years this people in this age group will have to buy up a house. The government will also support the housing sector as it is a huge employment generator. After agriculture, it becomes the second largest employment generator if you add up all the jobs that come about in ancillary industry.

In housing directly, you have construction workers, masons, carpenters, plumbers, engineers, accountants and so on. But more than that, housing supports various other industries including cement, steel, paint, power etc. If you add the jobs created in all these different industries, it’s a huge number. And in India, in my opinion, the single most important need is the continuous creation of jobs to satisfy the large number of people passing out from schools.

Do you see banks’ CASA pressure continuing?

It is completely incorrect that bank deposit are not growing as people are investing money in capital markets. When you invest in shares, money simply moves from the buyer’s bank account to seller’s bank account. The level of deposits at banks does not change. The challenge banks are facing in mobilising deposit is largely due to higher food inflation seen over the last one year period. A high value of bank deposits comes from the middle income and below middle income customers, not necessarily from HNIs.

I think the RBI has done a fantastic job in controlling inflation. We did not see higher inflation, or pumped large amount of liquidity in the system, which western countries did post Covid-19. But while inflation was controlled, food prices tended to go above high level. Food inflation, except for last month, has generally been high. For a lower middle-income person, her single largest expenditure is food. I think it’s as simple as that and I think with food inflation coming down, CASA deposits will come back, it’s just a matter of time.

The Trump administration has announced reciprocal tariffs on various countries and 26% on India. Do you see it affecting the Indian economy?

One has to sit back and really deep dive and study it in more detail as to which company, industries, and sectors will be impacted. But, we have to look at it from a relative standpoint. Exports for India is not as large a part of our GDP, as it is for China or many other countries. It is at around 22-23 per cent. Even within our exports, US accounts for only less than 17 per cent. In that sense, it is not an extremely material thing, but yes, there will be an impact. Whilst the tariffs on India is 26 per cent, the tariff on all the other countries which compete with India are higher, whether you look at China, Vietnam, Bangladesh, and the surrounding countries in Asia. In that sense, tariffs may not be that negative for India.