For the rest of FY13, Sanjay Mathur of RBS expects a total of 50 basis points cut in interest rates, but not before September. Speaking to CNBC-TV18, Mathur said the RBI is in a wait and watch mode now. “We are probably not going to see anything until September, which is when we are clear as to which way the fiscal is going, about increases in domestic fuel prices, what sort of impact they have etc,” he explained.
The central bank yesterday cut key policy rates for the first time in three years. The surprising 50 basis point cut boosted sentiment on the street, but Mathur believes it will take a while longer for it to change the macro economic environment. “The broader investment/business climate is what needs to be rectified, and I don’t think 50 bps is enough to change the viability of a project,” he said.
He goes on to say that there was no political motivation behind the RBI’s decision to start easing. “If it was just a matter of pressure, then they could have pretty much stopped at 25 bps,” he explained.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.
Q: Are you in the camp which believes that the RBI frontloaded a lot of what it had to do for the next many months and may actually go on pause now?
A: Yes, we do feel that the RBI did 50 basis points because the market was pricing in 25 basis points, so I think it was a good positive surprise. That said, the accompanying statement continues to have a cautious tone to it. That suggests that we are probably not going to see anything until September, when we are clear as to which way the fiscal is going, about increases in domestic fuel prices, what sort of impact they have etc.
So I think they have shifted into wait and watch mode. But that has not preclude further rate cuts. We should see rate cuts if the inflation trajectory pans out the way the RBI has been talking about. But I guess overall, scope is probably another 50 bps in the second half of the year.
Q: There has been a lot of talk about how the Finance Minister half an hour before the credit policy indicated or hinted quite blatantly that a rate was coming, leading to thoughts that maybe RBI reluctantly moved so sharply because of political persuasion. Would you believe such theories?
A: No, I do not think so, particularly if you look at the quantum of rate cut. If it was just a matter of pressure, then they could have pretty much stopped at 25 bps. In fact, if you look at the statement also, there was a different tone that the RBI had taken. One, 7.3% growth for FY13 is not something that comes out of the government. The government has continued to talk of 8.5-10% growth, depending on who the person in the government is speaking about.
Secondly, they have almost signalled that there seems to have been permanent shift in the trajectory of inflation post the global financial crises. So in some sense it was a strong statement by the RBI saying that India’s growth-inflation mix is deteriorated.
Q: To be clear, you are saying in the June meeting and the July meeting you will be surprised if the RBI moves again on the rate front?
Q: Bond yields have cooled down substantially to about 8.3% now. Do you see more room on the downside or will rates stabilise and plateau here?
A: There could be some downside if the government sticks to its fiscal programme, but at this point in time we think that yesterday’s rally was a pretty sharp one and most of the juice out of this trade is now gone.
Q: What is your sense of how market should read the future trajectory right now, given that expectations are inflation might get its head up again? Do you think the market should not expect any rate cuts for the next six-seven months and then only if data is supporting it?
A: It is very clearly data contingent. As I said earlier, we will need to see the impact of higher diesel prices, we will need to see whether crude prices remain at this level and what sort of broader shape the fiscal policy framework takes.
Q: Do you think 50 bps will be enough to galvanise a lot of capex that the stock market has been very circumspect about? Do you expect any material changes to the economic environment because of this 50 bps cut?
A: Absolutely not. I think that it’s very important to bear in mind that the rising cost of capital is one of the several factors behind the slowdown process. There are broader issues, particularly in the area of policy reforms. How we move towards reforming state electricity boards (SEBs) in the power sector, establishing coal linkages, land acquisition policy etc. So I think it is the broader investment/business climate that needs to be rectified.
Q: So you don’t think this will get sentiment up to the extent that you might see a kick-start, because that would be a material kind of a takeaway for the stock market?
A: Let’s look at it in a different way; let’s assume they go another 50 bps, so they do a total 100 bps. Today your loan to deposit ratio is already at what would be a theoretical limit after considering SLR and CRR. So in that sense, banks are pretty much chockablock in terms of their lending portfolio. It is not a question of demand for credit therefore at this point in time.
So even if you get 100 bps reductions in the policy rate, lending rates are not going to decline by the same amount. And is 50 bps enough to change the viability of a project? I don’t think so.