RBI may cut rates by 25 bps, volatile mkt seen: Edelweiss

Hopes are growing that the Reserve Bank of India is likely to cut rates in its monetary policy review on January 29. Rashesh Shah, Edelweiss Financial Services is looking for a 25 basis points (bps) cut in both repo and cash reserve ratio (CRR) and 100 bps cut in the whole of 2013.

Also read: Edelweiss Financial Q3 profit rises 11% QoQ to Rs 46 cr Adding that interest rate cuts will fuel investors' optimism, Shah warned that retail participation growth is only possible after February. "Usually retail investors wait for about 5-6 months of the market consolidation after which they usually enter the market. So, I would expect maybe after March-April is when we will see a broad based retail activity in the market." Though, earnings growth in Q3 have been slightly better than estimates Shah is expecting 14-15 per cent growth in corporate earnings in FY14. He is also worried that the volatility in market is likely to be high for 5-6 months. Below is the edited transcript of his interview to CNBC-TV18 Q: A quick word in terms of your Q3 numbers and what you are seeing with regards to the capital markets business especially retail participation. Do you see it coming back? A: I think overall we have seen improvement in Q3. If we go forward Q4 as well as the coming year FY14, we do think that slowly the capital market activity is coming back. Hopefully, there is an interest rate cut coming in. Then it will even fuel investor optimism. So, on the whole I think coming three-four quarters look good. On the capital market side we are still seeing a lot of investment from Foreign Institutional Investor (FIIs) and some high net worth investors coming back. However, the broad based retail participation will happen only after February-March. As usually retail investors wait for five to six months of the market consolidation. After which they usually enter the market. So, I would expect maybe after March-April is when we will see a broad based retail activity in the market. Q: What are you expecting the Reserve Bank governor might do and more importantly what might he say in terms of a hint for future policies tomorrow when he delivers the policy? A: Off late, we have been seeing that inflation has been coming down. That gives some amount of room to start cutting rates. As we project inflation for the next 5-6 months inspite of the expected increase in the diesel price, we do think over the next 5-6 months inflation should come down to about 6 percent. So, assuming that Reserve Bank of India (RBI) is looking at it same way we do, expect there will be atleast 25 basis point (bps) repo cut. A 25 bps cash reserve ratio (CRR) cut because we need the CRR cut also to increase liquidity. Liquidity adjustment facility (LAF) is still more than Rs 100,000 crore, which is a lot above RBI’s comfort level. So, I think 25 bps repo and a 25 bps CRR will be good. However, along with that the RBI’s commentary will be that they are fairly positive on the inflation expectations in the coming months. Inflation should start coming back from under 7 percent to maybe the 6 percentage range. Q: Assuming we get aggressive rate cut of around 50 bps tomorrow do you think that it is enough to stoke re-ignition in the investment cycle one and two? How do you expect the repo rate and then progress for the rest of the 2013? Do you think that this will just be front-loaded? A: I think our expectations are that RBI has room to cut about 100 bps in the repo rate. This is say about 8 percent now. So, come down to about 7 percent. Unlikely, that they will front-load it. They will watch inflation over the next few months. They would want to see the fiscal gap. Also, the current account gap is still fairly high. It is not coming under control. I think as a result it will put some pressure on rupee and inflation eventually. So, I think RBI will try and be more staggered about it rather than try and front-load it. Use up all the ammunition that they have. So, our expectation is that 25 bps, which is what market expects. If they come up with 50 bps repo cut then it will be slightly above the market expectations. We might see a strong sentiment-related boost to the market. However, RBI will have to be careful because over the next 5-6 months they would want to be calibrated. Over the year I would say 100 bps is they have. So 8 percent going to 7 percent, if we think inflation is going to be in between 6-6.5 percent for the year. _PAGEBREAK_
 
Q: They perhaps will give some worries about the current account deficit (CAD) or whatever, but if that’s the tone that we don’t see headroom as of now and here is this 25 bps, which we are giving rather unwillingly, if it is a hawkish tone. Do you think the stock markets take a very big knock? A: I think investors will get slightly disappointed. It is not just the amount of the rate cut. I think 25 bps or 50 bps, but it will also be the hawkish tone as you said. The hawkish tone will start getting concerned that is inflation going to come back under control. I think under 7 percent especially under 6.5 percent, if we come there around May-June-July, which is what our expectation is. I think we expect it to be around 6.5 percent or under somewhere around the second quarter of this calendar year. If RBI says that it is not as confident then I think very clearly investors will be cautioned and people will hold back their investments until you really start seeing inflation coming down. Q: How have you looked at the earnings so far? More importantly what are you penciling in by way of an earnings growth in FY13, more importantly in FY14? A: I think on the whole earnings growth has been slightly better than expected for Q3. However, at the same time it is not the robust growth that we all want. I think expectedly so because corporate have slowed down. Interest costs have gone up and we are not seeing as much top-line growth as expected. Quite a few sectors like auto and all are now facing slowdown in a very significant way. So, our expectation would be that FY13 will still be very moderate corporate earnings growth rate. FY14 is where we should start seeing some amount of growth. We expect between 14-15 percent growth in corporate earnings for FY14 in a very conservative scenario. I think a lot of the investments that corporates have been making will start coming of age in FY14. Given that FY14 should be okay from earnings growth point of view, while I think Q3 and Q4 for FY13 should still be fairly subdued, but still slightly better-than-expected.
 
Q: What would it be your three asset classes in terms of priority for 2013 between commodities, equities and maybe fixed income? A: I think gold has now started stagnating. If one sees the last 4-5 months action, equities have clearly outperformed gold. We do think that the current year will be the year of equities. Not just in India, but all around the world. In the last couple of years most of the investors in India like insurance companies and mutual funds and even retail investors have been more overweight on the fixed income side and gold side than on equities side. It has been the same globally. I think globally also investors are much more overweight on bonds as compared to equities. For the last couple of months we are and will see it for quite part of the current year. Also that the reallocation for bonds to equities will happen and as far as retail investors in India are concerned, I think now that for three-four months equities will outperform gold. We also expect that the shift away from gold into equities will also happen. Also, coupled with the fact that if inflation and interest rates are coming down, then a huge attraction for gold as a hedge against inflation will also start tapering down. I think, equity markets if they continue to consolidate and do well, we do expect as I said earlier April onwards retail investors to be more into equities than any other asset class. Q: Would you be a buyer into the broader markets at all considering that we did see that steep fall in the midcaps two-three days ago and possibly last week. Any trepidation which you would be concerned about? A: Though all of us are optimistic on the equity markets, I must also add that the volatility will also be very high especially for the next five-six months. The fundamental parameters like inflation, current account gap and all still have to improve. As long as it is not there, investors will always be slightly edgy and itchy. So, we will see some sharp corrections like the one you mentioned. I think on the whole - those should be opportunities for investors to increase their allocation to equity and will provide good entry points rather than getting shaken out. The broad trend is still upward. The high volatility can be an advantage from an entry point of view at least for investors who are not trading oriented and not overstretched. So, broadly the next couple of months will give quite a few investment entry opportunities for investors.