RBI to cut rates by 25 bps in June, Jul, Sept: Deutsche

After India's manufacturing index went down to a 50-month low, market analysts have been forecasting FY14 GDP growth and debating Reserve Bank of India's move in the upcoming meet.

Taimur Baig, economist (India), Deutsche Bank is worried about the domestic outlook and believes growth in the first half of the new fiscal will remain stagnant at 5 percent. He, however, expects productivity to pick up in the second half and FY14 may close with a 6 percent GDP growth. Also Read: India industrial growth not just fading, but reversing: BNP
Baig expects the Reserve Bank of India (RBI) to cut rates succumbing to the reality of weak data and declining inflation. "We have rather aggressive calls on the rate side. We not only expect RBI to cut in the mid June meeting but also in July as well as in September. So we are looking at another 75 bps rate cut not because of anything the central bank has said, but from the real data flow it will be compelled to keep on cutting," he says in an interview to CNBC-TV18. Below is the verbatim transcript of Taimur Baig's interview on CNBC-TV18 Q: Monday’s Purchasing Managers' Index (PMI) numbers seem to be at odds with the expectation that the second half is going to see a big recovery in economic data for India. What did you make of that including the core figure we reported?
A: We are cautiously optimistic but the caution part is rising unfortunately. The last two PMI readings are disappointing. The only silver lining from the June PMI is that the export orders have picked up sharply. The core view that we have as far as India's turnaround is concerned, it will be driven by external demand.
We are seeing significant pickup in demand in the US, we are excited about what is happening in Japan, China is also on the cusp of a pickup in the second half of this year. So on the export side, India still has some hope. However it is worrisome, when you look at domestic orders, domestic outlook is still very poor. The RBI rate cuts or the government’s measures so far haven't really changed investor sentiment and that is something we are worried about and that does pass a downside risk to our growth forecast. Q: A lot of your peers have gone ahead and scaled down their FY14 as well as Q1 FY14 gross domestic product (GDP) forecast. Where are you on those two parameters?
A: In the Q1 FY14, it is going to be lukewarm. Getting something in the range of lower 5 percent is the best one can expect and now with the IIP data that we are seeing, there are more worries to be expressed. However, going forward for FY14 as a whole we still think growth could pickup in the second half of the fiscal year and we could get something in the range of close to 6 percent.
_PAGEBREAK_ Q: The lingering problem remains manufacturing and what is happening on that front. We just finished up earning season in India where the numbers from capital goods and infrastructure companies were quite poor, what is happening over there?
A: There is absolutely no pickup there, other than construction, activities in India are fairly subdued and nothing that the government has done so far in terms of any flagship project or any demonstration effect has had any major impact. So the onus remains on getting plan spending going which can then have something of a multiplier impact on galvanizing both private sector activity and investment. But we are off to a very weak start in the fiscal year, nothing major positive there so far. Q: How do you expect all this to sit on the shoulders of the RBI that meets and decides on what to do with rates later in this month?
A: RBI is sounding very hawkish, but it will succumb to the reality of weak data and declining inflation and it will cut. We have rather aggressive calls on the rate side. We not only expect RBI to cut in the mid June meeting but also in July as well as in September. So we are looking at another 75 bps in rate cut not because of anything the central bank has said but from the real data flow it will be compelled to keep on cutting. Q: There seem to be a fairly strong warning signal from other markets. The currency market where the rupee has been steadily depreciating through the course of last month and yields have begun hardening again in the bond market. What have you made of those developments?
A: It is understandable to some extent especially in the context of what is happening globally, we are seeing a big dollar cycle and the strength of dollar is hard to fight for most Asian countries. In India where there is large current account deficit (CAD) the situation is certainly vulnerable.
On the rate side also, we are seeing a lot of convulsion in the global market space both credit and rates markets have sold substantially in anticipation of some tapering in the US. In short-term global markets have overreacted, both the dollar strength and the rates sell-off are a bit premature so we do see in the short-term there is a bit of a pullback and that will help the rupee.
In the medium term, there is a secular trend towards strengthening dollar and rising interest rates that will be hard for India to fight. However, the fact that Indian local markets are one of the very few major local markets that have a clear rate cut cycle ahead would allow India to differentiate itself. Fixed income investors would remain interested in India because they do expect the rate cut cycle to continue.
Given what is happening on the commodities side, it is very difficult for me to look beyond that issue that gold prices are falling, oil prices are falling precisely when India is tightening gold import requirement and raising domestic fuel prices. The rupee will be a winner net-net in that but right now giving the market action it is just hard to believe that it is a forecast for the second half of this year.