May 24, 2012, 10.40 PM | Source: CNBC-TV18

RBI policy move unlikely in June: Kotak Mahindra Bank

The Reserve Bank of India's next policy meet is on June 18, 2012. Indranil Pan, chief economist at Kotak Mahindra Bank doesn’t expect the central bank to take any policy action in June.

Indranil Pan, Chief Economist, Kotak Mahindra Bank
The Reserve Bank of India's next policy meet is on June 18, 2012. Indranil Pan, chief economist at Kotak Mahindra Bank doesn’t expect the central bank to take any policy action in June.

He expects another 25-50 bps rate cut in FY13. “But our belief is that it would more happen in the second half of the financial year than in the first half,” he adds.

Below is the edited transcript of his interview with CNBC-TV18's Sonia Shenoy and Ekta Batra. Also watch the accompanying videos.

Q: If you look at this hike in petrol prices, not in isolation, but as a part of a broader strategy to increase administered prices and eventually reduce subsides. Do you expect to see a big relief on that account, if something comes out tomorrow from the EGoM meeting?

A: I think that definitely is likely to be a positive. The implication of petrol price hike on the inflation is about 10-15 basis points, but it doesn’t do anything to the fiscal deficit. The diesel and the LPG price hike is likely to bring down the levels of subsidy bill under the fiscal, which actually has the balloon to a very significant extent because of the depreciation in terms of the rupee. So, I think that is definitely a positive step. It would be viewed positively by the investors.

But I think a lot more needs to be done in terms of trying to project that India is an investor friendly country. There needs to be certain steps that need to be to be taken to revive the capital capex cycle, which will obviously take sometime. So, I am not really expecting a very sharp turnaround in the rupee. But sentiments can actually stabilise and we might find a new range for the rupee in the 54-56 bracket. Possibly that would prevent any sharp further depreciation of the currency.

Q: What is your perspective with regards to any sort of sensitivity analysis that you might have gone with diesel price hike? If we get a price of say Rs 5, what impact would that have on inflation and the fiscal deficit?

A: The fiscal deficit, to a certain extent, is also dependent on what is the incremental currency view that happens in the market. If I get a lower currency because of some turn in the sentiment, then the impact would be lower in terms of the diesel price. So, we have not really quantified the extent very clearly.

On the inflation side, to a large extent, the diesel prices would be about 40-50 basis points incremental in terms of headline inflation. If there is a LPG price hike to the extent of Rs 25-30, we can see the direct impact about 60-70 basis points. That will also have a second round impact in terms of the inflation dynamics.

Q: We have seen cuts in GDP forecast by big banks like Morgan Stanley etc in the past many days. Morgan Stanley has cut the GDP target to 6.8% from 7.5%. Would you have any scale down in your GDP estimates, given the kind of macro worries we have had both in the form of fiscal deficit and the rupee?

A: Incidentally, we had been looking at these macro worries for quite some time. We were never really expecting that even with policy rate reductions by RBI, we would see a big upswing in terms of the investment cycle. I think the key reason why we were not anticipating a big upswing out of policy interest rates is one because we were clearly indicating that there is some sort of liquidity tightness that would continue. High government borrowing programme would also lead to preemption of funds by the government, typically the crowding out effect. So, the corporates might not benefit significantly with lower borrowing costs.

Secondly, the visibility of demand from the global world is so weak that it doesn’t really make sense to add capacity immediately by the manufacturers. So, we had factored in all these issues way back in May 2011. We had projected FY13 GDP growth number at 6.6%. That is where we are holding at this point in time.

The next round of possible revisions could be timed with the incremental information flow that happens. For example if Greece ultimately exits the euro and there is a sharper recessionary trend globally, we might have to reduce it lower or if monsoons fail in a significant way that can be another cause for worry.

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