Time for surprises is over; Bet on no rate-cut: YES Bank

YES Bank chief economist Shubhada Rao explains to CNBC-TV18 that she does not expect the RBI to initiate a rate-cut. Rao adds that every corner of the economy presents a worrying situation characterised by government inaction, weakening growth and persistent elevated inflation.

Below is an edited transcript of the interview on CNBC-TV18. Q: The Reserve Bank governor continues to be hawkish especially as far as inflation is concerned and has very clearly stated that the near-term outlook on inflation continues to be marked by number of upside risks despite the significant slowdown in growth. I know it’s incorrect to draw a parallel between what the report says and what the macro economic policy tomorrow may be. But on the basis of reading the RBI governor’s stance would you put your money on a cut? A: My bet would be absolutely on status quo with no change in liquidity-augmenting measures. So, I think the status quo would be a continuation of the hawkish stance of the Reserve Bank. Similar concerns have been reiterated both on growth-enabling measures as well as the inability of using monetary policy incessantly to essentially contain a supply-side problem. Q: So, status quo policy is what you expect. But the RBI has made very clear that it has little room to maneuver. To quote the RBI, “The fiscal and monetary space to stimulate the economy remains limited in the presence of an already large fiscal deficit and persistent inflation.” So, does the battle between the government and the RBI wage on? A: Unfortunately, yes. This time the RBI has gone a step further and prescribed a revival of growth to the government, reiterating that a lot of confidence-building is to essentially come from government policy actions Q: The RBI has explained that fiscal room needs to be created by curtailing subsidies. But given the current scenario, especially with the monsoon failing, do you believe that the government is going to bite that bullet and move on the diesel subsidy? A: At this point, expectations regarding the ability of the government to push through with fuel subsidies is low. There is hope of a lower fertiliser subsidy for this year which may give the government room to extend itself over fuel. I think the ability of the government to restore credibility on the Budget arithmetic is completely hampered at this juncture. _PAGEBREAK_ There are worries are on all fronts- weakening growth, persistent elevated inflation and limited policy action. I think this year and perhaps next year, suffice to say that India would be able to just post a growth of 6-7%. A lot needs to get done on the policy front by the government. Q: As far as corporate India’s reaction is concerned, it’s a no-brainer they are going to give credit policy a big thumbs-down if absolutely nothing happens. But, what about the bond markets? How do you see the bond markets reacting in that situation? A: I think the bond markets are pricing in the RBI initiative. The RBI has been eloquent on inflation. But based on the industrial production data, will the RBI surprise with a rate cut? My bet is that the time for surprises is over. We need some credible action and a positive surprise on that front would be good news to cheer. But as far as the bond markets are concerned, my sense is that a lot of what's happening is getting priced including the expectation of a status quo.