RBS still hopeful of 50bps rate cut in FY13

The central bank's policy inaction on Monday came as disappointment for both the equity and the bond market. A CNBC-TV18 poll also indicated that 90% of the people polled were expecting a 25bps repo rate cut.

However, Sanjay Mathur, head of research and strategy, non-Japan Asia, RBS still expects the Reserve Bank of India to oblige the market with a 50bps rate cut in FY13.  Defending RBI's move to keep rates unchanged, he said: "The RBI was quite correct in lobbing the ball back in the government's court that you need to get on with the reforms process. That is when monetary policy will have greater impact." Below is the edited transcript of Mathur’s interview with CNBC-TV18. Also watch the accompanying video. Q: How does this change or alter your expectations for the second half? Do you expect to see anything more in terms of rate cuts or are you down to zero like some of your peers? A: No. We still continue to see more rate cuts. We still think that 50 basis points reduction is definitely round the corner. We think that this inaction by RBI yesterday has only delayed a rate cut, so we do pencil in 50 basis points more. Q: Earlier every time we got a weak growth number like a weak GDP print or a weak IIP print the market would get excited about the prospect of a RBI move. After hearing them out and what they had to say about the connection between interest rates and growth do you think the market should now take a slightly different stance of these growth readings? A: There are two or three aspects. First of all, the RBI was quite correct in lobbing the ball back in the government's court that you need to get on with the reforms process. That is when monetary policy will have greater impact. The second part, I thought was more confusing in terms of the number of times the central bank has shifted back and forth between which inflation wherever we should be looking at whether it is core, it is headline or it is a consumer inflation. They need to signal one variable to the market. We would have thought it should have been core inflation given that growth is very weak. Now one of the points that the RBI did highlight was that there are bottlenecks in the economy and if we cut rates at this juncture that would have been inflationary. I am not so certain of that because capacity utilization levels in the economy are dropping. Growth is definitely subtrend. So, we have just managed to delay the inevitable. At this point in time people do believe that the RBI has changed its stance, in my view it hasn’t. It has just been that they have to reassess the situation. It is also true that probably inflation would start to look better – now that the rupee though not quite strong has somewhat found a floor or a ceiling between 55/USD to 56.50/USD and oil and commodity prices are coming down. So, chances are that we will see rate cuts. Q: The explicit mention of non passage or non pass through of fuel prices yesterday seem to suggest that the government may have made an informal promise to the Reserve bank that it would cut diesel rates but did not follow up on that promise which prevented the RBI from cutting rates itself. Do you think now a further rate cut becomes contingent on a diesel price hike? A: We would think so, but a lot of it would also depend on crude oil prices themselves which continue to come down. I think that as important a variable. As far as banking on the government to make the fuel price increases, one really needs to see who can hold on further. I don’t think if the government is emotive to do anything. As far as RBI is concerned at some point they will have to see the weaker growth momentum. Let us assume there is a diesel price hike. How much does it really do to core inflation at a time when growth is weak – surely the pass through must be very limited at this stage. Q: Just on that limited issue of commodity price though there were quite categorical about the fact that they saw any QE move by developed economies as detrimental for India. What is the RBS’view in terms of what the Fed may deliver or anything more that the ECB may and whether the Indian macro should read that as negative even if the equity market chooses to read it as positive? A: The impact of QE on India or in emerging markets in general is very indeterminate. If we look at the last QE that we had, QE2 asset prices, commodity prices reacted favourably in anticipation of it, but as soon as QE was introduced we found a level, when it was actually introduced. This time even if we do get QE the environment is radically different. I think that this QE if it does happen or if the ECB does resumes its LTR operations it should be viewed a purely as crisis management. We have a Europe that is falling apart by the day, so in many ways the market will look at it more as some kind of an emergency assistance and not a true QE. So to that extent, that the impact would be positive but it will be fairly muted. Q: Where are you at right now in terms of growth expectations? A: We are looking at 6.2% for the year. There is a lot of hope built into these numbers still that some how in the second half we will see some acceleration in reforms. If that does not happen, then we can be sub 6% for sure.