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Jul 26, 2012, 05.07 PM IST
As the debates continues as to whether or not the RBI must loosen interest rates, CNBC-TV18 spoke to two experts - Manish Wadhawan, HSBC and Samiran Chakrabarty of StanChart, if they were expecting a non-event policy or if they felt the RBI may choose to surprise.
Ahead of the Reserve Bank of India’s (RBI) quarterly monetary policy review, investors and market analysts are wondering which way the pendulum will swing on July 31. The RBI is grappling as it tries to increase its foreign capital inflows and build up its reserves that have fallen substantially in the recent period due to market intervention.
As the debates continues as to whether or not it must loosen interest rates, CNBC-TV18 spoke to two experts - Manish Wadhawan, HSBC and Samiran Chakrabarty of Standard Chartered Bank, if they were expecting a non-event policy or if they felt the RBI may choose to surprise.
While Wadhawan finds the probability of a rate cut high and is expecting the central bank to surprise the market with a 25 basis points rate cut, Chakrabarty isn’t holding out for a move as he doesn’t see an interest rate cut getting the economy back on the fast track to growth.
RBI had opted to hold rates in the mid-quarter policy review in June, citing upside risks to inflation. Our economic environment meanwhile continues to take a whack due to a lacklustre monsoon so far this year. Inflationary pressures as well as a crumbling rupee continue to pose a threat.
The RBI has projected inflation to be around 6.5% by March 2013, with a caution that it will remain sticky and that there was a need to arrest the decline in economic growth.
Below is an edited transcript of their interview.
Q: Would you go with the extraordinary majority of people who are expecting a non-event policy or do you think the Reserve Bank could well choose to surprise? It’s the best chance they have to surprise.
Wadhawan: I would be in the minority camp. I would say given the push which is being talked about by the government and the way things are panning out, I expect that RBI might surprise us with a 25 bps cut this time. If you see the market levels also we have already seen the market started factoring in some kind of policy easing. If you see the CD rates three months back and today where we are, they are down by something like 50-75 bps.
The Government of India’s bond yields 10-year paper is down by something like 30-40 bps from the peak it achieved in Jan-Feb. The market is already to some extent factoring in that, though I appreciate what the governor said that inflation is still high. But on balance I would say with the way the numbers are coming and I am also putting in one more factor which is the drought situation which is still uncertain, putting all the pieces together there is a probability of a rate cut and the RBI might surprise on that.
Q: What is your expectation on Tuesday? Do you think inflation will be on top of mind? What exactly would your inflation trajectory be, considering the situation on the monsoon at this point?
Chakrabarty: This is a classic case where your mind tells you there should not be a cut but there is always a fear at the back of your mind whether there will be a surprise from the RBI. Now we just did a quick analysis of the last 12 policies. In the last 12 policies in four out of 12 cases, the RBI sprang a surprise on market expectations and in the last two it surprised and that is probably driving this fear in the market that there could be another surprise around the corner.
But really, we should not be forecasting on the basis of surprises. In our view, we should be forecasting on the basis of what the RBI has been telling us because I would like to believe that their guidance is what they will follow and if I follow their guidance then it looks to me there should not be any rate cut on Tuesday.
It is a different story that we can argue against the RBI logic of saying whether interest rate cut at this juncture is going to help growth or not. But it seems that the RBI has taken a stance that interest rate is not the reason why growth is slowing down. So an interest rate cut is also not going to revive growth. At the same time, it might reunite the fears of inflation.
Tags: RBI credit policy, rupee, inflation, quarterly monetary policy review, Manish Wadhawan, HSBC, Samiran Chakrabarty, Standard Chartered Bank, OIS
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