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Sep 18, 2012, 03.35 PM IST
Robert Prior-Wandesforde of Credit Suisse told CNBC-TV18 that it would be surprising had the central bank cut rates yesterday. He foresees the central bank cutting rates by 50 bps on October 30.
The Reserve Bank of India (RBI) on Monday left interest rates unchanged but slashed the cash reserve ratio by 25 basis points for banks. It said that the primary focus of monetary policy remains battling inflation, days after the government announced slew of reforms to boost growth and improve its fiscal position.
According to CNBC-TV18 poll, most market experts expected RBI to leave rates unchanged whereas only few expect a cut in repo rate. Robert Prior-Wandesforde of Credit Suisse told CNBC-TV18 that it would be surprising had the central bank cut rates yesterday.
"RBI is likely to wait until they see the measures announced by the government being implemented. Also, they need to see some sort of drop in inflation," he added.
He foresees the central bank cutting rates by 50 bps on October 30 .
Below is the edited transcript of Wandesforde’s interview with CNBC-TV18.
Q: Were you disappointed with what you heard from the Reserve Bank? Were you expecting a repo rate cut?
A: No, I wasn’t. In fact I would have been very surprised if they had done for two main reasons. One is that we had a fairly nasty wholesale price inflation (WPI) print on Friday. Secondly, there was always a danger for the RBI that government having announced all these measures would then be forced under severe pressure to withdraw them.
The RBI would look rather red faced if they had cut interest rates purely on the basis of those government measures and then the government had to withdraw them. So, they are always likely to wait until they see those measures being implemented. Even then, they do need to see some sort of drop in inflation as well.
Q: It doesn’t look like a rollback is on the cards from the way the political noises are coming in. Would you have higher hopes of a rate cut then in the October 30 meeting?
A: Yes, I would. I am certainly expecting a slightly better than 50% chance of a rate cut then. 50 basis points is what we are going for October 30. We have seen rollback before. I hope you are right, I hope there won’t be rollback, I am not expecting it, but the RBI couldn’t take that chance even if it was a fairly small chance.
Q: It looks like the inflation will remain sticky for the next many weeks. In fact it will go up once the Diesel price hike comes into play. Do you think the RBI is sufficiently worried about growth or sufficiently confident that the government has started on the path of fiscal adjustment to be able to look at rate cuts despite inflation remaining fairly stubbornly high?
A: I certainly think they are going to give the government some credit at October 30 meeting. Whether they then have to wait and see for inflation to actually come down towards that 5.5-6% level, I am not entirely sure.
What the RBI might well now do is focus more on the headline rates excluding fuel. It will be very odd in a way for the RBI to not cut interest rates on the basis that we have had a fuel price adjustment, which the RBI itself has been pushing extremely hard for.
The WPI rate ex fuel is the key here. I do think that we will fall in the numbers for September, which RBI will have before the October meeting. Some sort of fall assuming we haven’t had any rollback in those reforms, will then enable the central bank to lower interest rates.
Beyond October 30, we will need to see that WPI rate fall further towards 6% or possibly to 5.5-6% that sort of level. I am still hopeful that, that will happen. Once that condition is met we might see two or three fairly quick interest rate cuts from the central bank. So, overall I am still looking for 125 basis points of cuts by the end of this current fiscal year.
Q: What are your thoughts on the moves that you are seeing from the government over the past 72 hours? Do you think that any of that can rekindle growth in the economy or for now we are just talking in the realm of sentiment?
A: I certainly think the short term impact is fairly negligible. Hopefully, there will be a sentiment booster amongst the corporate sector and that may translate eventually into higher capital spending. I don’t think we should anticipate any big near term effects. It seems to me that over time there will be atleast a couple of benefits.
One is I would expect to see stronger foreign direct investments coming through as a result of these measures and that will be useful in financing the current account deficit. It is much better for the current account deficit to be financed by foreign direct investments as opposed to FII investments.
Secondly, the multi-brand retailing issue comes with a condition that foreign retailers have to invest heavily in storage facilities. That is crucial to stopping so much food rotting which in turn is crucial to helping bring the food inflation rate structurally lower once again. Those are the two key longer term benefits from this as I see it.
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