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Apr 12, 2012, 10.07 AM IST | Source: CNBC-TV18

RBI's April policy is crucial for market: Macquarie Sec

The Reserve Bank of India (RBI) is scheduled to announce annual monetary policy for 2012-13 on April 17, 2012. In an interview to CNBC-TV18, Richard Gibbs, global head of Macquarie Securities says, the market will be disappointed, if the RBI doesn't cut rates.

The Reserve Bank of India (RBI) is scheduled to announce annual monetary policy for 2012-13 on April 17, 2012. In an interview to CNBC-TV18, Richard Gibbs, global head of Macquarie Securities says, the market will be disappointed, if the RBI doesn't cut rates.

He further says, market and investors need to see some monetary stimulus, monetary accommodation to support the growth dynamics in the Indian economy. 'So, yes, it is going to be critical meeting because it has the capacity to either arrest some of the declining sentiment or conversely to accelerate that negative sentiment,' he adds.

The global markets have been weak over the last couple of days. Gibbs says, weak US eco data has triggered the global equity markets fall.

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: Can you take us through what exactly happened in Europe? Is it now reemerging as the biggest spot of worry, hence, the ripple effect is seen across the global space or is it the concern coming in from the US macros and that is exerting pressure across the global equities?

A: I think US macro would be catalysts for all this. Non-farm payrolls were a big disappointment. I guess we were heading for big disappointment, given we have had some pretty stellar results in terms of payrolls. But that 120,000 increase was not sufficiently large to absorb the new entrants. On top of that, we had a spate of discouraged workers coming through the data as well, people leaving the labour force. It was an unambiguously weak outcome. It did raise the doubt the veracity of the US recovery.

That has been concerns about China whether there will be hard landing or soft landing. If we cannot keep growth in US economy or in China, how we are going to be able to maintain growth in these heavily in debted economies of the Euro zone.

Q: Is there a liquidity angle to all this? We did see some good money coming in because of the two rounds of financing done by the ECB in mid-December or early December and in February. Is that running out now, so are we going to see a bit of a longish consolidation or sell-off?

A: It was a sugar fix. It wasn't a structural fix to the issue, particularly in relation to the sovereignty. I think it is running out. Therefore, we either need in of another sugar fix or we are going to see market continuing to drift off.

Q: In light of all this, where exactly do you see near-term money moving to? Is it then just going to be safe haven assets and then consequently what would be the effect on commodities such as Brent crude?

A: I think most of it is going to be fairly short-term. I think longer-term investments plays will now have issues with the rally in the first few months of this year stretching those valuations. When companies are faced with top-line growth problem, which a lot of companies around the world are now facing, that is going to raise real concerns about placing that longer-term investment to work, all those funds to work, that liquidity to work.

Central banks have the capacity unleashing that to support growth, particularly China, also India. In China and India, there are long going concerns about price pressures and whether that might limit the capacity of central banks to provide that monetary support.

Q: You are not expecting any sugar fix from the western governments or central banks in that case, are you not counting in on a QE3 or anything from ECB in the near future?

A: I am certainly not discounting a QE3 in United States, but it will be a sterilised version this time around, very different to QE2. I think we will be directed and focused on housing sector in the US. It will have to be unleashed in the June-July period, ahead of the summer holiday and they give it time to gain traction ahead of the presidential election in November. Similarly, the ECB, if they see US move that way, they will need to do something more substantially as well.

Q: How crucial is April 17 meeting of the RBI? Would you say that if that expected rate cut didn't come, it will be pretty seriously disappointing, you could see some foreign money walking out, would a lot of decisions hinge on it?

A: I think it will be disappointing, if it doesn't come. What has occurred in the last month or so is pretty much a uniform downgrading of growth expectations for the Indian economy. That means that we try and balance that equation.

Markets and investors need to see some monetary stimulus, monetary accommodation to support the growth dynamics in the Indian economy. So, yes, it is going to be critical meeting because it has the capacity to either arrest some of the declining sentiment or conversely to accelerate that negative sentiment.

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