RBI may cut 100 bps in CY13; expect 5.3% GDP for FY13: RBS

Ahead of the Reserve Bank of India's monetary policy meet on January 29, Sanjay Mathur of RBS believes the positive macro data sets the stage for the central bank to ease rates by 50 basis points. He also expects the GDP growth for the current fiscal to range around 5.3 percent and feels it could go up to 6.5 percent in FY14.

Mathur further added that the RBI may cut rates by 100 basis points in calendar year 2013. Besides, he also stressed on the need for adequate investment flow to provide a rate cut impetus to the central bank. Credit Suisse sees 50 bps rate cut in RBI policy review Here is the edited transcript of the interview on CNBC-TV18. Q: It was a fairly seminal breakdown in the inflation momentum that we saw yesterday. Headline number was lower, month-on-month it was lower, core inflation fell by 30 bps. Overall, manufacturing inflation fell about 40 bps and more importantly, the revision of the October number was downward instead of upward? What does this stage for in terms of the credit policy on January 29 itself and for later on in the year? A: Yes, I think that the numbers are unambiguously positive when it came to the Wholesale Price Index (WPI), whichever way you cut it. It was a clear deceleration in inflation and I think the numbers have established if you look at the trend over the last three months. The pass through from higher oil prices hasn’t been as strong as we would have imagined at the first stage and that’s really telling it that producers are finding it hard to pass on input cost increases at this stage because demand is weak. I think that it clearly sets a stage for a 50 bps reduction at the forthcoming review. Now the question really is, what do we see after that? I think after that it is going to be a little tougher because we have to remember two things – one Consumer Price Index (CPI) isn't coming down aggressively enough. It was quite high and that means the real deposit rate for the household sector is still low and that suggests it will continue to feed through into gold demand and the current account will remain under pressure. That is certainly an area where I think the Reserve Bank of India (RBI) is going to be increasingly watching going forward. Q: Now we have spoken a lot about inflation, the Current Account Deficit (CAD) and how that might actually weigh on the RBI’s mind. What is growth looking like according to you at this point because we did have the Index of Industrial Production (IIP) numbers for the month of November, which were pretty much in aberration, but is the trajectory for Q3 FY13 GDP and henceforth, what could we close FY13 in terms of GDP for? Would you be as pessimistic as some of your peers who are estimating 5.2 percent? A: We are very close to it. We are at 5.3 percent. Now having said that, I think if you look at the production number they were undoubtedly weak. But, the sequential decline has somewhat slowed down, if anything the headline number was sort of flat. We have also seen that the Purchasing Manager's Index (PMI) has somewhat picked up. I think we are somewhere at the bottom of the cycle. Going forward, you can expect a mild acceleration in growth. It is still going to be a long time before we get back to around 8 percent growth. But, I do think that we are in a position to look at growth coming in at about 6.5 percent in FY14. Q: I want to get back to that argument that you made on CAD. Can the central bank really move and take two steps at one time on January 29, when that 5.4 percent CAD looks all set to be 6 or 6.1 percent for the Q3. What’s your own trajectory of CAD and to repeat that question, will any central bank have the courage to encourage consumption when you have such an ugly CAD number? A: I think that India is in a very strange situation. You have to be mindful of the CAD and at the same time you have to be mindful of the fact that a lot of the inflation is due to supply side constraints. If you don’t get investments going, you will keep running into this problem. You have to take a balanced approach. As far as the 50 bps rate cut is concerned, this is not the first time that the RBI is going to do a 50 basis points cut in one go. They have done it in 2011, at the beginning of the cycle. In that sense, I think the idea behind it is that for once you sort of come with a big bang and then you monitor the situation and that’s quite typical and characteristic of the RBI. Q: So for 2013, what would the trajectory by the RBI be according to you? Do you think that it is going to be frontloaded in terms of repo rate cut and then they will work on an ad hoc basis with regards to cash reserve ratio (CRR), which they did in 2012 or do you think that they are going to be more frontloaded or maybe sort of staggered on repo, based on the fact that inflation actually is possibly easing? A: I think what they will do is they will go with a 50 bps cut and then they would do another 50 basis points, but on a staggered basis, with 25 bps in the first phase and another 25 bps later depending on how CPI and the external situation pans out. Q: How are you drawing the trajectory of growth for FY14? A: It sort of accelerates and by the time we hit the Q4 FY14, we are looking at 7 percent growth. Q: There is a lot of opinion that one of the things that actually might restrict the RBI is the risk on the currency or the rupee in 2013, as opposed to 2012, where it has been propelled by capital inflows, which have been robust. So once you take that out of the equation, there is more of susceptible risk to the currency, which the RBI might actually factor in or foresee in 2013. Do you think that would be a restricting factor for the RBI to move very aggressively in this year? A: I think that the currency is really related to the CAD because if you look at the environment, we have got a strange situation. We have got regional currencies which are rallying. We have capital flows which are quite robust. So what’s really eating it up, what is affecting the rupee is the size of the CAD, which is eroding away the overall balance-of-payments (BoP) surplus. I think that the currency and current account are very closely tied to each other. If we do see a risk rally etc at some stage, you might see a bit of a turn in the household sector, away from gold into financial assets. But, I guess it is too early to say anything on that conclusively.