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Jan 02, 2013, 06.34 PM IST | Source: CNBC-TV18

RBI rate-cut may be gradual to support growth: Experts

Economists Samiran Chakrabarty of Standard Chartered Bank and Shubhada Rao of YES Bank discuss on CNBC-TV18, in the backdrop of a rise in the current account deficit to 5.2 percent, that the RBI may cut rates gradually to support growth and stem the impact of the rising fiscal and current account deficit.

Shubhada Rao

Chief Economist, YES Bank

More about the Expert...

Economists Samiran Chakrabarty of Standard Chartered Bank and Shubhada Rao of YES Bank discuss on CNBC-TV18, in the backdrop of a rise in the current account deficit to 5.2 percent, that the RBI may cut rates gradually to support growth and stem the impact of the rising fiscal and current account deficit.

Below is an edited transcript of the discussion on CNBC-TV18.

Q: How do you think yields might move? Will it touch 7-7.75 percent in this quarter?

Chakrabarty: About twenty days ago, we turned 'overweight' on bonds aiming to buy 10-year G-Sec at 8.20 percent targeting take-profit levels of about 7.80 percent. I think that trade has worked well for us. We bought bonds with two aspects in mind. One, was an easing of monetary policy and second, probably the market was ready for a lot of excess supply but compared to that the OMO amount would be higher. Our basic presumption was that the RBI would support the market. So clearly holding onto that trade looking at 7.80 percent on bond yields is kind of a no-brainer if the RBI delivers on a rate cut on January 29.

Q: According to data released on Monday, the current account deficit (CAD) is at 5.4 percent for the previous quarter. How difficult do you think controlling the CAD is possibly going to be in FY13? Do you think it might get worse?

Rao: The risks to the fisc will definitely increase with the CAD worsening further from 4.2 percent. This has prompted us to review our estimate which indicates that the third quarter is also going to be stressful in terms of the CAD-GDP ratio at 5.4-5.5 percent.

The CAD will be tough to rein-in as the challenges to the economy remain- there has not been any improvement in exports and imports continue to gain strength and robustness. And it is unlikely that this direction is going to reverse very quickly. So the high level of CAD is something that will have us worried at the closing of the fiscal year and going into the next year as well.

Q: The rupee has not been reacting to the increase in the CAD and other worrying economic data because of excellent FII flows. But do you see the situation coming to a head in 2013?

Chakrabarty: To be honest, the data released on Monday was related to the quarter-ending September, so obviously the markets did not react to it. But if you look at the rupee movement in the October-to-December period, I think the depreciation in the rupee was primarily because of the trade-deficit data being much higher than anticipated and the data will start to reflect on the current account only in the release of date in March. So we are still way off from CAD-GDP ratio peak.

Q: What kind of peak do you expect?

Chakrabarty: The peak could be even higher. Let us also understand that the Q3 GDP is most likely to be soft. But if the trade deficit numbers keep improving and the FII inflows continue then probably there could be some support for the rupee in Q4, though it is only going to be a very modest. As long as the monthly trade deficit stays above USD 15 billion, I think the pressure on rupee is not likely to reduce.

Q: Would you expect a very volatile rupee for 2013? What is the range for 2013 for the rupee?

Rao: I do not entirely agree of the occurrence of a severe risk-off. US economic data does seem to suggest that, on a sequential basis, there is marginal improvement. Yes, the eurozone risks will continue to persist, but with the greater risk of the fiscal cliff showing some semblance of control, there will not be any worsening-off of appetite in terms of risk, going forward.

There are expectations of improvement in the domestic macro-economic factors. So capital flows to that extent will begin to improve. There has not been any sharp, dramatic recovery in most of the macro-economic factors, but it is definite that they will be much better in 2013 as compared to 2012.

With all these macro parameters going to be supportive of capital flows coming into the economy which, in my opinion, will be more supportive to the rupee. I estimate a broad range of 52-55 persisting. For the rupee to touch 57, there needs to be some very sharp adverse and negative news. Overall, I think the rupee could be ambling between 52-55.

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