Expect RBI to ease rates by 25bps tomorrow: StanChart Bank

Ahead of the Reserve Bank of India's monetary policy review on January 29, analysts seem to be agreeing on a gross consensus of at least a 25 basis points rate cut. Samiran Chakrabarty of Standard Chartered Bank also feels the central bank may go for a 25 bps rate cut tomorrow. According to him, the declining inflationary trend may provide room for easing rates.

However, Chakrabarty feels that the RBI's guidance for the rest of 2013 is going to be crucial. "We think that there is a window now of another one-two rate cuts because inflation will be on a declining trend for the next few months. If RBI takes that into consideration and gives a new cue to a dovish guidance, that can trigger some kind of market reaction. Otherwise, only a 25 bps rate cut with a neutral guidance might not trigger the same amount of excitement," he opined.
Moreover, the government’s efforts to bring down the current account deficit are being viewed positively, added Chakrabarty. Going forward, he expects the deficit to moderate from current levels. Here is the edited transcript of the interview on CNBC-TV18. Q: What are you going with from the RBI, more importantly what will the governor say in terms of guidance for the rest of 2013?
A: At this point of time, a critical question to answer from Reserve Bank of India’s (RBI) perspective will be how much importance they will give on the declining trend in inflation versus the still elevated level of inflation. On balance, I think RBI would go for a 25 bps rate cut.
The crucial thing will be on the guidance part. We think that there is a window now of another one-two rate cuts because inflation will be on a declining trend for the next few months. If RBI takes that into consideration and gives a new cue to a dovish guidance, that can trigger some kind of market reaction. Otherwise, only a 25 bps rate cut with a neutral guidance might not trigger the same amount of excitement. Q: How much do you think the current account deficit will weigh on the RBI governor? Even if the fiscal deficit promises are delivered, can he really cut rates and encourage consumption at a time when current account deficit is as high as 5.5 to 6 percent?
A: We all know that there are certain inflexibilities, rigidities in our current account deficit which cannot really be solved by the interest rate policy. To that extent, the governor should discount the relatively high current account deficit number.
However, since the number has now crossed 5 percent of GDP, there is no way the RBI can ignore the number completely. Let us also understand that the consumption part of our imports is relatively lower. In other countries we can very easily correlate a high CAD with high demand, but it might not be the case in India.
There are other reasons why this CAD is happening and there are some steps now being taken to reduce the CAD as well. The diesel prices have been increased, there have been increased tax on gold imports. Overall, we might just see the current account deficit number moderating from these levels as well. I am sure that RBI is going to flag this off as an issue but, that driving the monetary policy might be stretching it a bit too far. Q: Any fear that because of that there would not be any rate cut or do you think that is going too far and that is not in your case?
A: If you want me to choose between no rate cut and 50 basis points rate cut as my two risk scenarios, then I would rather choose a no rate cut as a more plausible option rather than a 50 basis points rate cut. So you can sense where my bias lies on this. My base case is 25 bps but, the risk case remains of a no rate cut. Q: What about fiscal deficit from a long-term perspective, something we know has been delivered on the fiscal deficit in terms of the bulk diesel rates being hiked to market levels etc but, the rest is on the basis of promises for the future? How are you reading it in terms of the ability to sustain fiscal deficit at 4.8 percent and how much do you think that the RBI is going to believe it and be influenced by it?
A: There have been some very concrete, very bold steps taken towards fiscal deficit consolidation, that too in a pre-election year. Obviously, the hopes from the finance minister are now much higher. He has crossed the more difficult hurdles and now is the time to just nail it by announcing a 5.3 percent for this year and a 4.8 percent for next year.
It is not impossible to do but, it is difficult to do especially for this year because already 10 months of the year is over. There is very little flexibility left now to reduce this number. There are a few elements like divestment etc which we cannot be completely sure till it is done. I am not absolutely sure that the 5.3 percent will be met but, I am very happy to note the consolidation process that is going on, which to my mind is a very big positive at this point of time.
For next year, if we aim at 4.8 percent, we need both expenditure as well as revenue buoyancy and there I would like to see not only revenue buoyancy through tax rate increase but more through tax base increase etc. which the FM has promised. If that is delivered, we will be pretty comfortable on the fiscal consolidation front. Q: If indeed what you suspect from the policy is a 25 bps rate cut with a cautious or neutral tone, how are you seeing the 10 year move in the next couple of weeks or a month?
A: As long as the RBI keeps the option of rate cuts open in its guidance and does a 25 bps rate cut, there is a scope for yields to come down by about 10 to 15 bps more from where they are. However, a bigger rally towards 7.50 percent would require another round of rate cut, probably in March.
Also we have to see that the FM sticks to his commitment that there is no excess borrowing for this fiscal that would create a better demand-supply balance in the market and help yields come down. Overall, a range of 7.70 to 7.50 percent is possible if we get a 25 bps rate cut along with a guidance that more rate cuts might come. Also Read:

• 25bps rate cut will be non event for bond market: Nomura
• No big dip seen in bank lending rates even if RBI cuts repo