New regime to be a little dovish under Urjit Patel: Taimur Baig

In the same discussion Ananth Narayan, Head of Financial Markets at Standard Chartered opines that market was expecting a dovish RBI Governor who would cut interest rates, but chances of that were unlikely in the near future.

Sticking with the popular consensus, that this hiring is a sign of policy continuation, Narayan said that the market should expect a more hawkish tone from the RBI.Below is the verbatim transcript of Taimur Baig and Ananth Narayan’s interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal.

Latha: I can't see the first bond tick but how do you react as a bond expert, the news of the new governor?

Narayan: I can't see the tick either but I presume it would be down by about 4-5 bps as in the yields would be higher by 4-5 bps. A couple of reasons really, one is I guess the market was probably uncharacteristically hoping for a dovish governor to come in and kind of present us with a few rate cuts though not really warranted by the monetary policy framework that is clearly out of the window with continuity coming in back into the entire Reserve Bank of India (RBI) regime.

Second, in the last few days we have seen a bit of rally coming through and global indicators aren't that bullish any more with oil taking back again and of course we have got the Jackson Hole coming up later this week and data seems to be slightly more positive for growth and less positive for bonds globally. So, to that extent the correction will continue. Of course all eyes subsequently on what the new governor has in store for us on things like liquidity management on the entire debate, outside of monetary framework including health of the banking sector and transmission and so on and so for the where we will have to wait and watch.

Latha: What would you wait and watch, the first open market operation (OMO) announcement in September?

Narayan: Absolutely. A lot of the rally which we saw the last few days was fuelled by the liquidity injection and the promise of further liquidity and we have got this event of foreign currency non-resident (banks)-FCNR(B) repayment coming through. If you recall Governor Rajan did mention that he would front load liquidity management so as to ensure smooth transition through the FCNR (B) repayment. The proof of the pudding will be in the eating and it will be interesting to see how RBI under the new governor navigates through the FCNR (B) regime. I think that will be a true trust of the liquidity part of the equation at least and the market will take cues from that.

Latha: Your thoughts on the new governor?

Baig: It is very tempting to say that there is policy continuity especially since the governor designate Patel was framer of the inflation targeting report but I am going to go against the consensus here. I think that the expectation that the new regime would be more dovish toward the interest rate side, the exchange rate side and even on the banking and restructuring side that remains intact in my view. The very fact that this governor left and a new governor comes will mark a policy regime in my assessment and it would be towards a more dovish direction.

Latha: Dovish, what are you expecting?

Baig: Yes, again we need to see governor Patel's communication in the first go but like I said on exchange rate, interest rate and banking and restructuring side all three cases my assessment would be that it would be a little easier, little softer and little slower.

Latha: But why? I mean his commitment is towards 4 percent. His written and spoken word has been that glide path and we are at the moment a distance away from 5 percent. Maybe the inflation reading or the subsequent readings will be different but at the moment what is the basis of your expectation?

Baig: Of course we all know what the writing on the wall is as far as year-on-year (Y-o-Y) inflation rates are concerned. We all know that the base effect will work very strongly and there will be severe disinflation in the next three-four months and somebody with a dovish tilt that will be a very nice reason to cut rates. Of course in the first quarter of next year chances are inflation picks up again but that is a fight for another day.

However, there is a small window left. I am not calling for a rate cut, let me be clear. We have been very consistently saying that RBI would be on perma-hold but that was under the assumption that the Rajan style monetary policy remain intact and maybe governor Patel will surprise me and will live up to what the street is expecting which is the policy continuity but my call will be that it will tilt more dovishly.

Sonia: What about you? What are you expecting because most people that we have been speaking to indicate that at best there will be one more rate cut before the end of 2016? What are you forecasting?

Narayan: I would personally go with what I can see in the report. After all the monetary policy framework is the result of the eponymous Dr Urjit Patel Committee report which clearly looks at inflation target ting and perhaps flexible inflation targeting. To that extent a lot will therefore depend upon the glide path of 4 percent being achieved. The current last few readings haven't been very supportive of further easing. Of course inflation will come down and go up again and all of that but at least reading the report which is the only way we can judge what Dr Patel is all about. I would go with the consensus view that at the moment the market would expect a more hawkish tone from the RBI. I would be very happy to say Taimur's prediction coming true eventually.

Latha: At the moment are you buying 715 on the 10-year?

Narayan: Again personal view and not necessarily the view of the bank. I won't at this stage. There is more data to come out through the week both global as well as local and I would wait to get more clarity on what Dr Patel has in mind which would take some time to come through. I guess he prefers to speak through his actions rather than actual chats. So, we will have to gauge what his thoughts before we jump in again.