RBI may still go in for 25 bps cut on Jun 17: Indranil Pan

The Reserve Bank of India may still cut repo rate by 25 basis points at its monetary policy review on Monday, despite the pressure on the rupee, feels Kotak Securities economist Indranil Pan. Expectations of a rate cut receded after the rupee tumbled to a new low, and the slower-than-expected decline in consumer inflation for May appears to have further reinforced that view.
 
"The currency maybe wobbly, but unfortunately we all know that the currency at least in the case of India has really not been helpful in propelling the export segment in any way," Pan said in an interview to CNBC-TV18.

"Our main point is that the RBI needs to maintain a relatively linear trend in terms of interest rates momentum and that is the only hope that it has in this current scenario to provide some transmission given the fact that the currency dynamics does not allow it any space to provide liquidity in this system," Pan said. 
Also read: IIP, consumer inflation worrying, to worsen policy dilemma Below is the verbatim transcript of his interview on CNBC-TV18 Q: What are your first thoughts? Would you worry more about IIP or would you worry more about consumer price index (CPI)? A: I think we need to worry about both at this point in time. Coming more directly to issues like an RBI policy, yes it increases the dilemma for the RBI, but as a household we are still maintaining a 25 bps cut on the 17th of June. The specific reason why we are doing it is because the currency maybe wobbly. Unfortunately we all know that the currency at least in the case of India has really not been helpful in propelling the export segment in any way, which necessarily means that the textbook theory of monetary conditions easing out of the currency space really does not apply to India. Our main point is that the RBI needs to maintain a relatively linear trend in terms of interest rates momentum. That is the only hope that it has in this current scenario to provide some transmission, given the fact that the currency dynamics does not allow it at all with any space to provide liquidity in this system. So, Cash Reserve Ratio (CRR) cuts and the Open Market Operations (OMO) could also be to a certain extent limited. Therefore we would only be looking at a 25 bps repo rate cut. We were expecting the CPI to drop a little bit more in the sense that we were expecting vegetable prices and food prices to have come down, which probably will be reflected now in the next month's number, if it has not been reflected in this month's number. Q: Given the weakening demand that we have seen in any of these growth parameters, not just the IIP? Even the manufacturing PMI was at a 50-month low and rupee depreciation and perhaps even very high Current Account Deficit (CAD) as well. So do you see a downside risk to the FY14 GDP estimates? A: Our estimate for the GDP is at about 5.7 percent. We would not be looking any downside from the 5.7 percent, simply because from the fiscal point of view there was a significant amount of cut in the government expenditure with the aspiration to show a much lower fiscal deficit as a proportion of GDP than what most of the market was expecting and which they achieved. The re-revised estimate is about 4.9 percent fiscal deficit GDP. From thereon, if I really look at the type of expenditure increases that they have factored in it is almost about 22 percent higher than the re-revised estimates on the expenditure.
That itself provides an upward bias in terms of my overall GDP projections. If the monsoons are relatively better we would definitely be seeing pent-up demand on most of the consumer durables, as also the non-durables coming on, because as I am still expecting the RBI to maintain its linear trend in terms of the interest rate reduction. In terms of the rupee, my core belief is that it definitely was a bunched up demand that has happened, and the very fact that QE withdrawal was being talked about had led to this huge amount of depreciation pressure. So, rupee should once again be stabilising to 56.5 to 57.5-58 band that is what my outlook is. Given all these conditions we would continue to maintain a 5.7 percent GDP growth. Q: Therefore what did you expect the 10-year to do in India, it is at 7.31 percent at this point in time, if the rate cut were not to come since anecdotal dipstick surveys that we did seems to indicate that rate cut may not come, what would be the range for the 10-year? A: At one point in time with the huge amount of expectation from the RBI, we were at a 7.09 percent. A lot of repricing has happened on the yield curve, and that yield curve is flat at this point in time. I think the market has already to a large extent priced in that there are risks to be call of rate cut by the RBI. Q: 7.09 percent was when the 10-year was issued afresh, that is an artificial level, I do not think we can take that as a reflection, it was perhaps the scarcity value of that paper but from 7.32 percent, if the rate cut didn’t come where can the 10-year go to? A: Just to answer your question in a slightly different way - if my expectation broadly is 6.75 percent on the repo, best case scenario from the RBI, I would build in a fulcrum of 10-year at around 7.25 percent. We are more or less there. What I am saying is that incremental rate cuts by the RBI does not do much in terms of the 10-year yields coming down, and that is on the fear that inflation would once again tend to move up because of rupee depreciation or base effects going away or whatever is the case. The coal prices have been increased. So that should start reflecting on the wholesale price index (WPI) and all those issues would be there.