Won't be surprised if RBI chooses to pause: Deutsche Bank
Taimur Baig of Deutsche Bank AG told CNBC-TV18 that one should not be surprised if the central bank chooses to pause today as well. "The market will continue to price in easing even in case of pause today," he added.
The Reserve Bank of India (RBI) is widely expected make a modest cut of 25bps in interest rates today. According to a CNBC-TV18 poll, 95% of the respondents expect a rate cut; of which 90% see a 25 bps cut and 5% a 50 bps cut.
But Taimur Baig of Deutsche Bank AG told CNBC-TV18 that one should not be surprised if the central bank chooses to pause today as well. "The market will continue to price in easing even in case of pause today," he added.
The central bank had last reduced policy rates by 50 bps in April 2012. As the inflation rates stayed above the comfort zone of 5 percent, RBI maintained status quo on the rates front for subsequent five policy reviews.
Meanwhile, he expects RBI to continue maintaining a cautious stance and sees no need for it to remain very hawkish. Fifty percent of the people polled by CNBC-TV18 expect governor's policy stance to be more dovish, given the state of the economy; 50% thought his stance would continue to be dominated by inflation and deficit concerns.
Below is the edited transcript of Taimur Baig's interview with CNBC-TV18
Q: What are you going with, a 25 basis point (bps) like consensus or do you fear that the Reserve Bank of India (RBI) may pause this time?
A: There is nothing to fear even if they don’t cut, I don’t think it is going to be a massive negative for the economy or the markets, but exuberance that we saw in the market deserve some cold water being poured on. Last night's policy development statements certainly did accomplish that.
A couple of weeks ago I had made the argument that although the RBI had guided market expectations towards some sort of an easing policy measure in the first quarter of this calendar year, it was going to be a much tighter call than the market was thinking.
Just a few weeks ago the fixed income market was pricing in atleast 50 bps of cut. There were all sorts of exuberant talk about how aggressively the central bank is going to go in the first half of this year given that there is so much movement on the fiscal side.
What we will see in the policy statement today would mute some of that exuberance. The bottom-line is that yes, things are going in the right direction, but are going to have a conservative central bank moving rather cautiously. Whether they do 25 bps or not do 25 bps that would be the trajectory of monetary in 2013.
Q: Your previous note actually indicated that they may want to, but the situation probably doesn’t allow them do right now. So if they hold how much probability would you give that and do you think that’s something the markets either equity or bond are primed for?
A: The markets are probably not prepared for a pause an hour from now that would be a negative for the market, but I don’t think it is an overwhelming negative because the central bank is on an easing bias. It has said several times already the focus on monetary policy is towards supporting growth and less towards fighting inflation. If the statement turned to be slightly more hawkish than expected then that will disappoint some market participants and there might be some sell-off. But generally speaking, let’s say the central bank surprises us with a pause.
I am also calling for a 25 bps rate cut both in the repo and cash reserve ratio (CRR) today. But let’s see they surprises and they take a somewhat more hawkish stance. I still don’t think for the 3-6 month window the direction of monetary policy or the direction of what the market thinks the central bank would do, would be that much altered.
It will just how that a central bank that has been chastened in the past by policy errors is just trying to be very conservative and also trying to put a little additional pressure on the fiscal authorities to keep the momentum of reform going.