Expect rate cuts; WPI@ 7-7.2% in March: HDFC

Abheek Baruah, HDFC Bank, says that he expects that RBI will cut rates by 75-100 bps in CY13. He is of the view that RBI will cut rates in January but upside pressures to CPI and fisc deficit will remain. We expect WPI to be between 7-7.2 percent in March.

Below is the edited transcript of his interview to CNBC-TV18.

Q: What is your sense? What is the expectation in January and hereafter for 2013 in terms of rate cuts?

A: I feel that RBI will cut rates in January, but there is lot of risks around the corner. We are running fairly severe macro imbalances manifested in the very large current account deficit (CAD). From the micro level, upside pressures to Consumer Price Index (CPI) seems eminent. The impact of the passenger fare hikes according to our estimate is quite substantial for CPI.

We are beginning to see a turn and we will see the turn in the policy rates cycle but it will be muted. The RBI needs to be very cautious in moving ahead. So, in terms of rate cuts we are expecting 75-100 bps rate cut over the year and 100 bps is the best case.

We are building in the prospect of a turn in inflation by August-September 2013, thereby reducing the legroom that the RBI has for further rate cuts.

Q: Will RBI cut 25 bps on January 29 itself?

A: I expect the RBI to cut 25 bps in January, then another rate cut in March and finally one or two cuts in the first half of next fiscal year.  

Q: Rangarajan mentioned about 7 percent on Wholesale Price Index (WPI) in March. What is your trajectory for the remaining part of the year for WPI considering that there could be that fuel price revision or some amount of tweaking in order to reduce the subsidy? What do you think December 2013 in terms of WPI would look like?

A: In March, we expect WPI to be between 7-7.2 percent and then move down. The levels will definitely depend on policy moves that will taken place ahead.    

We expect it to bottom out in September given our current estimates at around 6.5 percent, it could be higher and then by December 2013 it would hit 7-7.1 percent mark again. If there is a possible diesel price revisions and other policy moves which are by definition inflationary then the trajectory directionally would be the same, but the levels could be a little higher.

Q: Would you agree that we should be able to see some stability in the rupee? According to a new released bulletin the forward intervention numbers of the Reserve Bank shows massive intervention. You are calculating accumulative forward swaps, but it has been a massive intervention in November month when we had excellent FII flows. Would you be a little worried if the risk on switched off for sometime?

A: Absolutely. I would be a little more concerned about the rupee and I think the CAD effectively sets a fairly high floor for the rupee below which it cannot dip and how much it depreciates or stays within a range will depend on the global risk off or risk on environment.

A number of events can potentially trigger fairly major risk off towards the middle of the year and given the imperatives of correcting the CAD. I think some degree of depreciation is necessary and I think the market will ultimately enforce that discipline.

So, I do not think 57 or 57 plus is necessarily out of the way for 2013 and I think in the interest of macro stability and balance we should see a depreciating rupee going forward, at least for the next couple of years. So from the depreciation perspective, I would tend to be certainly more concerned about the rupee. I am putting a number of around 57 for the end of the year that is December 2013.

Q: What are you expecting on January 29th? How many bps by way of cut and which instrument?

A: A repo rate cut of 25 bps but no cut in CRR.