RBI should cut rates by 50 bps by December: RBS

The RBI is expected to hold its policy interest rate steady at its quarterly review next week, keeping pressure on the government to reduce a ballooning fiscal deficit and take steps to remove bottlenecks that are driving up food prices.

"The houseview is 50 bps cut till December. From a trading perspective, we are in a much more aggressive stance. We think there is a possibility of somewhere between 50-100 bps of rate cuts," Bhasin said.

The RBI, which said it "frontloaded" rate cutting in April with a steep 50 basis point drop, has stressed the need for the government to reduce its fiscal deficit and said high interest rates were not the key reason for slowing economy.

"We expect RBI to be proactive and pro-growth and we are positioned in the market place accordingly," Bhasin told CNBC-TV18. Asia's third-largest economy grew 5.3% in the March quarter, its weakest showing in 9 years.

Complicating the picture for policymakers is weaker-than-average summer monsoon rains, which are pushing up food prices and adding to inflation. Economists still expect the RBI to cut rates to support sagging growth, but later in the fiscal year ending in March 2013.

According to Bhasin, the rupee would be the biggest beneficiary because the sentiment would change. "From 56 to a dollar, it’s very possible for a 5-7% rally back towards the 52 a dollar level in a very short span of time. From a stock market perspective, we have had a nice base at 5,200. There is big resistance at 5,600. You need to get past it. In this environment, I think it’s a little difficult in the next 6-8 months. You need to see how it plays out. But there is potential for the market to rally up to 5,600," he said.

Below is the edited transcript of Bhasin’s interview with CNBC-TV18.

Q: The next trigger could possibly be the Reserve Bank of India (RBI) policy early next week. What are your expectations there?

A: It has been an interesting survey that we just concluded, usually you get a magnitude of calls out of these things and we have been very right on these surveys. This time we think about 85% of the people we polled are suggesting no action by the RBI. The sentiment that’s been playing through the media has caught up.

A lot of that is now coming back to us in the responses that people have given us. Our own trading view is that there will be a cut of 25 bps. We expect RBI to be proactive and progrowth and we are positioned in the market place accordingly.

Q: What do you expect the RBI to do for the rest of the year? If this 25 bps rate cut that you are talking about, comes through, do you think that will be the last cut for this year?

A: The house view is 50 bps cut till December, from a trading perspective we are in a much more aggressive stance. We think there is a possibility of somewhere between 50-100 bps of rate cuts.

The bond markets look extremely well positioned and cheap to us. We think the range and the level of interest rates that are being offered is very attractive, both to domestic investors as well as institutional investors and also from trading standpoint.

Q: What kind of an upside are you playing for now, if all your expectations do come through along with some policy action as you are suggesting, what is the maximum upside to the index that you can think of?

A: On the policy front if you were to get a diesel fuel hike, say for example and it was aggressive, say Rs 5-7, I see that it would give enough room for RBI to start, to take an aggressive view on rate cuts.

We could probably see a 50 bps rate cut in the next two policy meetings. The rupee would be the biggest beneficiary because the sentiment would change. From 56/USD it’s very possible for a 5-7% rally back towards the 52/USD level in a very short span of time.

From a stock market perspective when you look at it, we have had a nice base at 5,200. 5,600 is the first base, big resistance there. You need to get past it. In this environment, I think it’s a little difficult in the next 6-8 months. You need to see how it plays out. But there is potential for the market to rally up to 5,600.

Q: Would it be fair to say that the worse has been priced into the markets and the downside risk from here on, is limited?

A: Domestically, a lot of bad news is priced in, I think what’s not priced in is if something was to go a miss either on hard landing in China or lot of different noises that might come out of Europe, so I think those factors are not priced in, into the market.

Sentiment would be severely affected if you got some negative stories out of that, in which case test of 5,000 would always be on the cards. But, you have a limited downside and a reasonable upside; its going to be a range bound market for the next 3-6 months.