Moneycontrol
Jun 08, 2017 03:47 PM IST | Source: CNBC-TV18

Don't see a rate cut anytime soon: I-Sec

In an interview to CNBC-TV18, A Prasanna, Chief Economist at I-Sec Primary Dealership Unit shared his views and outlook on the same. He expects to see some disruption in growth momentum in H1FY18 because of preparations for goods and services tax (GST).

Reserve Bank of India (RBI) leaves key policy rates unchanged but softens its stance on inflation by slashing its future projection hinting at a rate cut in the coming days.

In an interview to CNBC-TV18, A Prasanna, Chief Economist at I-Sec Primary Dealership Unit shared his views and outlook on the same.

“As of now in a baseline case, we don’t see a rate cut,” he said.

He expects to see some disruption in growth momentum in first half of FY18 because of preparations for goods and services tax (GST). “We will see recovery only in second half of FY18,” he further added.

He also thinks that it is difficult for 10-year bond to fall below 6.5 percent.

Below is the verbatim transcript of the interview.

Latha: Do you see a rate cut and when?

A: As of now in a baseline case we do not see a rate cut. We think if inflation evolves around the trajectory which is put out in the chart then we do not expect a rate cut. So inflation has to substantially undershoot that trajectory.

Latha: Going into August 2 policy, it is quite possible that there is going to be a sub-2 percent reading, then wouldn’t the pressure mount?

A: I think so, yes. As of now we don’t expect a sub 2 percent reading. We think inflation should bottom out from above 2 percent but like you said, there is a reasonable chance that we could get a sub 2 percent print in which case, we will probably adjust our projections and we would assume the MPC also will adjust its projections again then definitely chances of rate cut do go up.

Sonia: What about your growth projections, were you a bit worried about the fact that the RBI spoke about, lower growth as well?

A: If you look at it, they have just adjusted it to the extent that FY17 GVA growth has been adjusted. So still from FY17, it is a significant acceleration. In fact, our own view is we are not so optimistic like MPC. So we do think that GVA – we are penciling around 7 percent GVA growth this year. We think at least for the first half there will be disruption to activity because of preparations for GST and teething troubles with GST in the first few months and we will see a recovery only in the second half of the fiscal year.

Anuj: What about money market from here. Do you think in the near-term yields have bottomed out or do you think there is still more room to go and then in a medium-term, what is your call?

A: There could still be more room to go because of the momentum in the market but what we think is that there is more room for long-ends of the curve to ship down rather than for the benchmark tenure. It will be very difficult for the benchmark 10-year to dip below 6.5 percent but a longer part of the curve is still above 7 percent. There could be a significant movement there.

Latha: I am still looking at the psyche and the liquidity, as we get the reading next week and it comes in at whatever 2.3 or something and one month later, people are looking at therefore a 2 percent figure, wouldn’t that momentum drive the markets below 6.5 or at that point you will sell your bonds?

A: That is true. The momentum can drive it but my point is it may not sustain and we should understand that there is a lot of support from global factors also. I do expect the US treasury yields also to bottom out soon and therefore some of that support will go away.

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