See CAD narrowing, two rate cuts post June: Credit Suisse

Robert Prior-Wandesforde, Director, Asian Economics Research, Credit Suisse is of the opinion that there won’t be a rate cut in the June policy but there will be at least two rate cuts post June which will match their expectation of a 175 basis points cut through the year.

On the growth front he said their expectation of 6.5 percent growth for the current fiscal remains. He also expects the current account deficit to narrow more sharply than consensus expectations. “There is a likelihood of upside growth surprise which is now becoming increasingly crucial to what happens to the market, to keep this market rally going,” he told CNBC-TV18

Below is the verbatim transcript of his interview on CNBC-TV18

Q: It is an awkward situation for the market and what they have to take away from Reserve Bank of India (RBI) because the note is cautious each time but the rate cut seem to come in with that. What did you take away from their statements on Friday and would you expect to see more come on the rate cut front?

A: Yes it was a cautious statement but it has always a cautious statement. Subsequently in an interview the RBI Governor Subbarao said that the possibility of further easing is practically non existent and that seems a ratcheting up of the hawkish tone.

It seems unlikely at this stage that we are going to get a cut in the next meeting in June. I am still penciling in one for the end July meeting and then one further final reduction. But perhaps the key point is that it seems highly likely that we are much closer to the end of the easing cycle.

Our view all the way along has been we will get a 175 bps of reductions. We stick with that slightly nervously. We have had 125 bps now, so we are pretty much there. I think now the market is focusing on recovery. We need to see some stronger signs of economic recovery coming through at least from a macro perspective for the market to continue the recent momentum. I think it will come but of course there is bit of data lag. So if the recovery is starting now, we may not see it in published data for a couple of months or so.

Q: What is disappointing is that as you pointed out a bulk of the cutting seems to have been done but there is practically no follow-through or flow down in to the system. Most banks are clear about the fact that this is not enough for them to act in turn. Would you expect that situation to continue and by extension of that can there then be any alleviation in the system because of this credit crunch we have got going?

A: In some ways the main disappointment was the lack of cash reserve ratio (CRR) reduction. Obviously the commercial banks were pressing very hard for it but the RBI governor for whatever reason chose to ignore those calls. But if the question is will he continue to ignore those calls? I doubt it somehow. I think those calls will intensify and we will get another couple of CRR reductions, perhaps some open market operations and so on to try and further ease that liquidity squeeze.

To the extent that the current account deficit (CAD) is narrowing and will narrow more than the RBI expects, or most people expect. That should help as well. However, for the time being I don't think we are going to see banks following through significantly on this.

That is not to say there is no impact, we know that market interest rates have dropped quite a lot for example one year commercial paper rates are down something like 100-150 bps over the last 12 months. That will help with the margin.

There are bits and pieces out there and at the very least we can say that the interest rate environment is less unhelpful than it was. I think it is becoming slightly more helpful but it is not massively simulative.

Q: There has been some relief on a couple of macros like the way commodities have cooled off, some of our other macro data hasn’t been too bad. Are you changing or tweaking growth expectations around any?

A: Not really. We are very much on the high side for growth, so we got 6.5 percent for the current fiscal year. We think the recovery will begin in the current quarter.

The RBI is being a little too cautious perhaps on the timing and pace of the recovery. And that recovery I think will include capex. One could make an argument that the capex recovery has already begun. So if we believe the gross fixed capital formation numbers in the December quarter Gross domestic product (GDP )numbers, which will be backed up by better capital goods production figure within the Index of Industrial Production (IIP) numbers then it already has begun tentatively but it will continue.

There is a likelihood of upside growth surprise which is now becoming increasingly crucial to what happens to the market, to keep this market rally going.

Q: It is not the most dependable figure but there is an IIP tick as well that we get at the end of this week. Would that buttress the argument at all in terms of what's happening with growth or also push the RBI into a bit more in terms of rate cuts?

A: It seems as though the RBI is not focusing huge amount on growth. This is a very brief period when growth seems to take precedence. But again in terms of the statement that we had the focus seems to be on inflation and CAD and that is really where we need to see downside surprises and better numbers, if we are going to get Subbarao at least cutting.

What we don't know is who the replacement of Subbarao is going to be and how dovish he or she will be that is another wild card. However, at least for Subbarao we need some very good inflation numbers; we need some very good current account numbers.

Industrial production doesn’t matter a huge amount. For what it is worth, we are looking for a 3.5 percent number, so it has slightly improved but hardly fantastic and certainly not enough to lead the RBI to say 'No, that is it. We are definitely not going to cut anymore.'