The balance sheet of the RBI has gone up 300 percent in terms of its government holdings, which can be seen as our own quantitative easing, says Anand Tandon, CEO, JRG Securities.
Talking to CNBC-TV18 about the central bank holding rates in its mid-quarter credit policy review today, he says the RBI has been following a very high liquidity kind of policy, so its so-called ‘hawkish policy’ is not the problem that is holding the economy back.
Talking about the trade deficit number, he says India is a country which is importing far more than it should be, as it is easier or cheaper to import from overseas than to actually generate goods and services. He says that to take away pressure on the rupee, we will have to look at the trade deficit, but he doesn’t see that going away in a hurry.
Below is the edited transcript of his interview with CNBC-TV18
Q: Your key takeaways from the tone of the Reserve Bank of India (RBI) governor because many economist that we spoke to through the course of the day believe that the RBI is still biased towards cutting rates and perhaps if the macro improves, inflation eases, then July 30 is when they may go ahead and tweak rates. What is your view on how to approach the entire monetary policy now and how market should look at it?
A: I have heard a lot of commentary since the morning saying that it has been a hawkish policy. I don’t see where the hawk is, I can see a big large dove. The way I look at it is today if you look at the policies that are likely to come through, for example, increase in coal prices and increase in gas prices, which are something that the finance minister has already promised, inflation will go up.
Fact that the rupee is under pressure means inflation will go up. Therefore, if you are maintaining interest rates where they are, nominal interest rates real interest rates will fall. We are already in a negative real interest rate scenario, it will go further negative.
Essentially we continue to have a very highly stimulated economy where you keep on injecting dollops of cash, one of the things we haven’t been mentioning is for example that the balance sheet of the RBI has gone up 300 percent in terms of its government holdings, that is our own quantitative easing (QE).
Nobody talks about it. So, the RBI has been following an extremely accommodative negative real interest, very high liquidity kind of policy and that is actually not the problem which is holding the economy back. So, from the point of view of interest rates, the fact that the governor has essentially said look we will go for the negative is what is holding the market up.
Therefore, when you are talking about where the market will go or where the economy will go interest rates is not something that we should bother about at all. It is highly accommodative and it will apparently continue to be so.
Q: What about the piece of data or rather the trade deficit number that we got for the month of May? Was that scary at USD 20 billion or do you expect it to recede going down in June, something which the RBI as well as the government has spoken about?
A: We are at the pressure in terms of the current account and the trade deficit is a part of that. So, you are looking at a country which is consuming far more than it should be or at least importing far more than it should be and that itself tells you that we have become a high cost economy.
It is easier or cheaper to import from overseas than to actually generate goods and services yourself and that should give somebody a pause because for an economy like ours which is far away from full employment for us to become a high cost economy is not something that we should be happy about and that is what is causing the pressure on the rupee.
So, if you want to take away the pressure on the rupee you will have to look at the trade deficit but that is not going to go away in a hurry. You have to look at reasons why companies in India prefer to invest overseas rather than invest in India.
Apollo Tyres is the last case that we have seen where some massive investment is happening overseas but not in India. It just tells you that India has become an exporter of capital rather than importer of one and for a country which is still developing that is really sad news.
Q: What would all this amount to in terms of the future trajectory for the market, on the downside do you think we have seen the worst at this 5700 level and if yes what could the upside look like from here?
A: On a very short-term basis the answer is, yes you could have a small bounce is what we are seeing now because to a large extent the market was over sold, the movement was far too sharp on the downside.
However, in the medium-term and by that I mean even as much as six months I don’t see any reason why given current policy you should expect to see any major rebound in the market. If anything, if the rest of the world starts to do better you may actually see that the market can drift down dramatically from here.
When I say dramatically it is not that it will half but it could easily fall another 10-15 percent from here. Will it actually do that given that all central banks are still following a very high amount of quantitative easing (QE) I don’t know and it doesn’t seem very highly likely.
So, I would still say probability is that you will get a 10 percent fall and that is about as low as it goes for the near-term assuming that there is no catastrophe that happens in any other part of the world.
Q: What would your opinion be with regards to all that has taken place on the political front domestically in India and also tying in what we could see from the FOMC this week for example what sort of impact do you think these two developments could have and which one would have a bigger development in terms of a market movement going forward?
A: The Indian political situation is becoming a little more complex than it would have been otherwise but that said I don’t think that it has any direct relevance on the market much as you like to think there is.
I still maintain that as soon as you go into election you should start looking for a better market than what have currently and the expectations that the new government will come and improve polices or at least be in a position to make some policy decisions will probably drive the market at that stage.
So, I would not even wait for the new government to be formed and figure out who it is. My argument is that as soon as you announce elections you are likely to see a much better investment climate already. On the international side however the situation can go either way.
The market has read perhaps too much in terms of tightening, it is not likely that it will happen anytime soon and therefore I would expect that you would probably find that the flow of money that went out from emerging markets and the kind of yield movement that we saw in the US will probably reverse for a little while at least over the next month or so.