RBI policy meet on Monday: What are experts expecting?

The Reserve Bank of India (RBI) will announce its mid-term credit policy review on June 18.

Expectations are a bit mixed, but clearly have increased over the past week, especially after that extraordinary poor growth number. May inflation came in at 7.6%, in line with expectations, but clearly not a very happy number per se. In an interview to CNBC-TV18, Soumyo Dutta, managing director and head of trading at Citibank, A Prasanna, chief economist at ICICI Securities Primary Dealer and Jahangir Aziz, economist at JP Morgan, speak about their expectations from the central bank and give their outlook going forward. Also read: CRR seen unchanged; 25 bps repo cut likely, says CNBC-TV18 Poll Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying videos. Q: What have you made of the macro economic numbers and the way they are stacking up? What a central banker should do? What you think the RBI is likely to do? Prasanna: In terms of data, I think clearly growth has slowed down more than what RBI or even most of the market had anticipated, including us. April IIP data was quite miserable. Although I should point out that we have serious reservations with the quality of data and before we believe that the data might be overstated in the slowdown, but then this is a data we have to work with and therefore we have to pay attention to it. On the other hand, headline inflation is worrisome, but the core inflation for the last three months has trended lower. It is running around 5%, which is definitely a welcome news. The demand pressures are coming down. We have had freight hike, excise hike and rupee depreciation. Despite that, core inflation hasn’t moved up. So, the picture is quite consistent. In terms of what a central banker should do and what RBI should do, personally I would think it would be better for them to wait out in this review and take the call in July. If the data continues to print bad, for example, on the growth side or if things deteriorate further in Europe, you can always take the opportunity in July to cut by 50 bps. We have had some RBI commentary. Prior to the GDP data, the governor pointed out that they will take growth data into consideration. Post the GDP data, the deputy governor said that the room has probably increased for them to lower rates. So, if you take that into consideration, the fact that sentiment has been hit quite badly by the growth data, I think we will see a 25 basis points reduction in repo rate. Q: I personally would worry that we have not quite broken the back of inflation at all, even if the back of growth has been broken. What should the RBI do? What will it do? Aziz: I will agree completely with Prasanna. We have seen headline inflation go up, but we have seen core behave rather well. Infact if you look at three month, on three month movements, core has actually fallen and this sort of lines up with the fact that the economy is slowing down. I think the concern is that what we don’t know is how the world is going to behave in the next two-three months time. June 17 is the Greek election. I don’t think the Greek election will provide any real clarity as to what is going to happen to Europe. But I think over the next period of time, you are probably going to get much greater clarity in the degree and the amount of quantitative easing the Fed, ECB or Bank of Japan seem to be planning to do. If that happens then the decline in commodity prices, which we have seen, just might vanish. So, I would hope that the RBI waits out because that allows them to see both the political uncertainty and the policy uncertainty in Europe, but importantly also the political uncertainty and what the policy uncertainty will be in India. Hopefully by July 10, the problems associated with the presidential elections will be over. The government will really not have too many excuses not to do the things that it was suppose to do. Q: Do you still think that they might move, given the expectations that to some extent they themselves have kindled? Aziz: I think there is a lot of pressure on the RBI. The RBI delivered 50 basis points rate cut just six weeks back. That was more than what the market had anticipated and probably more than what was borrowed in that period of time. So, it isn’t all that difficult for the RBI to say, ‘look, we have given a 50 basis points rate cut, let’s see what happens in the next month or so. We can take a call on July 31.’ But I think the pressure is pretty high on RBI right now. _PAGEBREAK_ Q: What are you going with in the first place? What do you think the market is factoring in at this point in time? Dutta: I think RBI is indeed stuck between rock and the hard place. What they should do and what they probably will eventually end up doing, I would like to make the distinction. It looks like 25 bps repo rate cut is baked in into the price. If you look at the equity markets movement over the last couple of days, they seem to be very excited about a prospect of CRR cut of 100 bps. Given the growth concerns, what I would like them to do and being a trader myself, I would definitely like to see a repo rate cut and a CRR cut. Sooner the better because the further you postpone it, probably more you precipitate this crisis. What they may end up doing, I think they would probably defer the rate cut for the time being. I am pretty much in agreement with Aziz, maybe July is a better time to do that. For the time being, we maybe just have to be satisfied with a CRR cut and probably 50 bps. Q: What do you think will be the trajectory of the 10-year, if this is what is delivered, either 25-25 or a 50 on one of the instruments in the CRR? Do you think that we will see a rally in the 10-year all the way taking the yields below 8? Dutta: Over the next one month, if we see a combination of a CRR cut and a repo rate cut, I think the current momentum and the excitement continues. The new bond should definitely target 7.90% or even lower. However, if we don’t get the repo rate cut on Monday, markets maybe in for a slight bit of disappointment and we may see 10-15 bps sell-off. But as a trader, I would look at all those opportunities to buy because eventually we need probably over the next one year period atleast 75-100 bps lower rates. Q: What will the RBI say in its stance? How do you expect growth and inflation to pan out in FY13? Prasanna: As far as growth is concerned, clearly I think we are heading for a sub-7% growth because the first month’s index of industrial production (IIP) data is pretty poor. My sense is that I think the IIP data is a complete garbage, it is exaggerating the slowdown. I don’t think we are growing at 0.1%. We are probably growing at 3-5% kind of a range. But we never know when that will start showing up in the data. My sense is we should end up between 6.5% and 7%. Also, if we see RBI cutting rates and therefore banks start to pass it on, probably in the second half, there will be some improvement based on easy monetary conditions. But yes, if data continues to come like this, the sentiment will worsen. Also globally there is so much uncertainty, if thing go bad in Europe then I guess growth could fall further. So that kind of uncertainty is there around any growth estimate. As far as inflation is concerned, I think core inflation should still continue to rule around 5%, but headline will be above 7%. At this point or some point, the government has to hike fuel price. I don’t think there is any escaping there. The under-recovery amount has not come down at all because of the kind of rupee depreciation we have witnessed. So, the government will be forced to do it. Depending on that, you could see a headline inflation touching 8% also pretty soon. But broadly we would think it should rule between 7% and 8% and probably in Q4 of this fiscal year, it should come below 7%. Q: JP Morgan is looking at a GDP growth of between 6% and 6.5%. What are you expecting in terms of inflation? What should the RBI say in its stance? Aziz: We thought that once the base effect will dry out by March, inflation will be back up. Inflation has been back up. This 7.6% is probably running at 8%, given the kind of revisions we have seen. So, my sense is that inflation is already running at 8%, you are probably going to see that inflation approach 9% by July rather than come down. It depends on how the global markets or the global conditions behave, particularly what happens to global commodities and whether this decline in oil prices and commodity prices sustain through the second half of the year then we could see some decline in headline inflation. Core asset is where I think the problem is because it is very difficult to see whether or atleast sense at this point in time whether this is December of 2008 or March of 2010. In both periods, we had seen core come off. In December 2008, core fell in a sustained basis right through April-June because the global economy went into a massive downspin. In March 2010, it just lasted for a couple of months and was back up. I think the points on growth and monetary policy is that if 100 bps rate cut is all that stands between India 9% growth rate, I think RBI would have done that at a heart beat, regardless of whether or not inflation was at 8% or 10% or 15%. _PAGEBREAK_ Q: How do you think a stance will sound? Will the RBI sound dovish at all in its stance or will it warn that it has not much headroom? Aziz: I think what it will do is to follow what Bank of Thailand, Bank of Indonesia everybody has been doing is that to bring growth concerns much more on focus. And then put a cautious note that we are not out of the inflation woods as yet, we need to see more sustained declines. But I think what it will do is play much more the growth focus than it has done in the past. Q: What do you think the stance might sound like? Prasanna: I think RBI will continue to be cautious. Probably they will not be so definite as in April, when they kind of said there is very little room. They themselves wouldn’t have thought that they might be forced to cut rates so soon. So, keeping that in mind, I think they may not sound so definite. But they will continue to sound cautious particularly on inflation. Q: Under the circumstances, what are you expecting by way of future RBI action with current variables? Prasanna: What we expect is another 25 bps rate cut will happen in July. After that, I think it is completely uncertain. I would confess that I am not able to look ahead so clearly and predict with confidence that either there will be no further rate cuts or there will be another 50-100 bps rate cut. I would think that it is better to take it as it comes along in terms of data as well as what happens in Europe. Q: If the RBI sounds that it will be cautious both on inflation and growth and not promise much more action, how will the market find its way up until the July policy? Dutta: One very important aspect, which Prasanna also touched upon, they will probably make a very important distinction this time as in a contingency plan. So if indeed suddenly we see the global financial markets picture deteriorating pretty sharply, I am sure we will find somewhere an assurance that yes, we are there and we will act very swiftly. I am looking forward to that. Otherwise, apart from that, in terms of optimism, markets would clearly expect at least 75-100 bps rate cut. Hence, yields would not probably back up significantly higher. At any significant pullback, I think there will be lot of buyers who will come into the market and try to position for a significant move down. Q: This would be possibly the second year when we are going to have an inflation rate which is higher than growth, probably more than 7% inflation and probably more than 6% on growth. This used to be routine in he 90s. What might be the long-term effects of this? Prasanna: Confidence in India’s macroeconomic fundamentals will get impacted. I think that we have seen already. If the situation continues like this without any corrective measures and by corrective measures I mean largely on the government side, I think the confidence in Indian economy and the Indian economy’s potential will continue to be dented. I am not talking only about foreign investors, but also local investors and corporates. Q: Is that how the economy is going to pan out, inflation rates higher than growth rates for probably two-three years in a row? Aziz: I don’t think so. I think this year we will probably see that. Foreign investors don’t matter that much, it is domestic corporates who matter. My sense is that the domestic corporates are recalibrating their investment plans to a 6-5% growth rate rather than wait for an 8-9% growth rate. My guess is that the quicker this recalibration takes place, I think you will start seeing some investment taking place not to the scale as which we all hoped would happen or not in the scale of 2003-2008 definitely. But I think that you cannot have the kind of inflation growth dynamics in this world as we had in 1990s. So, if growth slows down to 5% levels, I think inflation will come down in the future too.