Budget 2013-14: Mkt hopes Budget '13 will be populous, says Kotak Mahindra

A lot of hope has been pinned on the Reserve Bank starting of rate cutting spree. The enthusiasm has waned after the current account deficit numbers for the September quarter were announced at 5.4 percent.

In an interview to CNBC-TV18, Indranil Pan of Kotak Mahindra Bank said that less than 5 percent could be the trigger for the RBI to start the rate cutting cycle. "25 basis points is the maximum that I expect from the RBI on January 29," he added.

Also read: Budget 2013: Book profits above 6,000 Nifty, bet on infra: IL&FS

In his view, steps taken by the RBI in curbing gold imports, thus Gold imports will continue to be a concern for the economy. He also informed that there is expectation in market circles for union Budget to be a bit populous with limited amount of expenditure cuts

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

Q: After the current account deficit (CAD) numbers and the likely trend what are you expecting from the RBI- do you think their maneuverability is curbed?

A: On the issue of maneuverability, definitely it is curbed to a large extent because the CAD as well as the fiscal deficit does not show too much of promise in terms of correcting.

However, the RBI could be swat by the factors that the core inflation is trending to be on the lower side. To a certain extent less than 5 percent could actually be the trigger for the RBI to start the rate cutting cycle. We need to be very cautious in terms of the pace that we would be seeing in terms of the RBI in terms of cutting rate. So, 25 basis points is the maximum that I could be expecting from the RBI on January 29.

Having said that, what I would be crucially looking at is the headline wholesale price index (WPI) numbers. As well as the consumer price index (CPI) numbers that comes out within the next week or so.

Q: You are expecting 25 basis points in January so say that comes through and say we get a bad CAD and fiscal deficit number in March, what do you think will be the trajectory for rest of the fiscal, despite the fact that maybe inflation, WPI and CPI might be trending lower?

A: the other important factor would be the Union Budget. It might turn out to be quite crucial in terms of the headroom that the RBI would have to further decisions.

The union Budget is the last before the union elections. There is some expectation in market circles that it would be a bit populous Budget with limited amount of expenditure cuts. We need to see how the government actually does the tight rope walk in the union Budget and tries to contain the fiscal deficit. RBI has been saying that they would be looking at the subsidy bill being capped at 2 percent as a proportion of gross domestic product (GDP). So, that also becomes important.

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Q: Is there some amount of exuberance which is factored in to the ten year? At this point in time what exactly is the ten year factoring in?  Do you think that it could go back to those levels of around 8.16 percent which we had seen pre-RBI policy in December?

A: To a certain extent the cancellation of the auction or putting the auction back on to February from January was one of the reason. Simultaneously in the same week we also had open market operations (OMO). So, there was an extremely limited amount of supply or the net supplies were actually negative during that period of time. This has lead to the piercing of the 8 percent that in my opinion.

The market could be in slight bits and doses may also be factoring in a 50 bps rate cut. If the 25 basis points happen with sort of not being as dovish as being expected, we might see the ten year yield going back to around 8-8.05 percent.

However, I would hesitate to say that it goes back to 8.15 percent unless of course the Union Budget comes out to be extremely negative. Negetive in terms of the governments borrowing programme, in an atmosphere where liquidity continues to stay tight.

Q: What is your trajectory of the current account deficit?

A: Unfortunately, we have not really done the trajectory of the current account deficit in the true sense.

Q: Can give me what you are expecting in the third and fourth quarters and broadly in FY14?

A: In the fourth quarter we are expecting the current account deficit to be marginally better off. In the sense that most of the business we see on the service sector comes in at that point of time. Freight account continues to be a big botheration. The crucial element that one needs to be watching out from now on is the oil prices. The steps are taken by the RBI in curbing gold imports. However, the unfortunate incident is that there is some amount of hoarding behaviors that is already been seen. This could actually jack up the gold imports in the third quarter, which is the key worry. For the year as a whole we are looking at 4.5 percent CAD GDP ratio.

Q: Third quarter is going to be 6.1 percent in terms of current account deficit. The new normal on current account deficit could well be 4 percent. Do you fear that?

A: The crucial element that would be the cut factor for the current account deficit is the oil prices. For example, the oil prices if it goes down to USD 105 per barrel we can get about 10-12 billion or 8 to 9 billion positive on the current account. The oil prices remain crucial. The gold imports remain crucial. What the government and the RBI combined can do in terms of containing the gold imports that also remains crucial. Global growth is another factor that remains very significant.