See 125 bps rate cut in FY13: Credit Suisse

Yesterday, the Reserve Bank of India (RBI) in its April-June quarter monetary policy left the key policy rate unchanged. However, it cut the statutory liquidity ratio (SLR) to 23% from 24% earlier.

In an interview to CNBC-TV18, Robert Prior-Wandesforde of Credit Suisse says, the reduction in the SLR does hint at a bias towards easing. "But in terms of repo rate, there is very much a wait and see attitude. The RBI wants to see whether headline inflation importantly is going to come down further over coming months," he adds.

He expects the next rate cut in October. "We still expect 125 bps in total, but very much back loaded, as far as the fiscal year is concerned," he adds.

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee.

Q: From hearing the RBI out, does it appear to you that they are in a mood to cut rates anytime in the next three-four months?

A: It doesn’t look that way, certainly not the policy rate. The reduction in the SLR does hint at a bias towards easing. That is a good news. But in terms of repo rate, there is very much a wait and see attitude, as far as inflation is concerned. The RBI wants to see whether headline inflation importantly is going to come down further over coming months.

They are not prepared to be preemptive. They are not willing to take a chance. The weakness in growth will feed through into inflation. Even though core inflation rates are very low, particularly on sequential basis core WPI, we estimated running at 2% at an annualised rate. So, it seems to be a very cautious central bank, atleast as far as the policy rates are concerned.

Q: Should one give up on latching on to these individual parameters? The RBI seems to be using whichever metric that’s convenient for it to basically push its point of view that it’s not ready to ease aggressively, sometimes core, sometimes CPI, sometimes WPI. Should we do this analysis or just take that broad message from the central bank that it’s not on easing mode yet?

A: I think it is in easing mode. We had the SLR cut. We had 50 bps of repo rate reductions, earlier we have had CRR reductions. We have had a lot of open market operations. So, it’s clear that they aren’t in easing more. But what I think is equally is that they need to see the inflation coming down. This is in a sense a new policy regime under Dr. Subbarao. It is similar to lot of other Asian countries or other Asian central banks that tend to wait for inflation to come down to more reasonable levels, before doing anything meaningful on policy interest rates.

The key is what happens to headline WPI inflation and to certain extent CPI inflation. If we see that coming down to 6.5-6% then that will be the trigger for further interest rate reductions. I think that is exactly what will happen. We expect the next cut in October. We still expect 125 bps in total, but very much back loaded, as far as the fiscal year is concerned. The risk of course is the monsoon.

Q: What do you expect the next GDP print to be? There are some in the market who believe that the next GDP print could be so ugly that the RBI then gets forced to focus on growth. Is that likely in your eyes?

A: We thought that, when GDP printed 5.3% and yet the central bank ignored it. The honest answer is I do not know. What confuses me is that there was nothing either in way of survey evidence or even hard data that would have suggested GDP would print at 5.3%.

Also, if we look at the expenditure breakdown of GDP and stripe out the fiscal discrepancies that make it similar to the output measure of GDP, actually the GDP rose 9.2%. I think what this tells us is that the quality of the numbers are extremely poor. So, anything could happen. I wouldn’t be surprise, if GDP printed slightly better in fiscal Q1, not because anything fundamentally has changed, but just because that fiscal Q4 number looks to be an aberration to me.