See FY14 growth at 6.5%, CPI key to rate cuts

In-line with market analysts' expectations, Robert Prior-Wandesforde, director, Asian Economics Research, Credit Suisse too believes the RBI will not cut the repo rate or the rate at which banks borrow from the central bank. The current repo rate is at 7.25 percent.

Also read: RBI cut rate unlikely on Mon; growth to take centrestage
Despite the wholesale price index (WPI) of May came lower than expected at 4.7 percent, Prior believes the RBI governor, D Subbarao will wait until the consumer price index (CPI) starts lowering before announcing any rate cut.
However, all optimism is not lost believes Prior as he expects the portion of total deposits banks are mandated to keep with the central bank, known as cash reserve ratio (CRR) in market parlance to be eased by between 30-40 percent.
The RBI has, since 2013 eased the repo rate by 75 bps and CRR by 25 bps. Below is the edited transcript of Prior’s interview to CNBC-TV18. Q: Most of our polled participants seemed to believe that a rate cut is not coming today. Are you optimistic or do you think it will be a non-event?
A: I am not optimistic. I did not expect a repo rate cut even before the recent rupee depreciation. Governor Subbarao has made it pretty clear that while lower wholesale price index (WPI) inflation is a necessary condition for a further rate cut, it is not a sufficient condition and he wants to see consumer price index (CPI) inflation lower. That did not happen to any meaningful extent to the numbers we had last week and also the trade deficit numbers were lower as well. We are still waiting for the May number, but that is unlikely to be good and certainly the April number was pretty poor. Never say never, but I would be very surprised if he seemed to go against his recent rhetoric. Q: It is also a bit of a rock and a hard place for the Reserve Bank of India (RBI) right now. They cannot move too much on rates because of what has happened with the currency and growth seems to be deteriorating as also some other internals like what has happened with crude etc. What do you expect them to do for the rest of this year, hold steady with this no rate decision?
A: First of all, I do not think growth is decelerating. I think growth is picking up. I think the recovery has begun. It has certainly begun in capex. Look at the numbers, capital spending is recovering. It will continue to recover and growth will surprise on the upside. The general mood is one of growth pessimism right now and certainly the economy is still expanding less than the trend. However, I think CPI inflation will come down. The trade position will also improve and therefore, I am looking for another couple of interest rate cuts, or two more 25 bps reductions. We have had a view for more than a year that the repo rate would bottom at 6.75 percent and that is still the view.

Q: Some of your peers have already cut growth outlook for FY14 to about 5.5 percent. At this point what are you holding as a target for growth?
A: We have a percentage point more than that- 6.5 percent. People are getting too gloomy right now and that in a sense is good news, because it does not require much in the way of positive news out of the real economy to provide and upside surprise. Even reasonably, good numbers is going to surprise a lot of people now. That is what we are going to get.
Towards the end of second half of fiscal year, we may get quite a lot more than that. The monetary policy is far less restrictive than it was. It is becoming more helpful. Fiscal policy is far less restrictive than it was. It is pretty much neutral now. People are forgetting about the lagged effects of the rupee depreciation on volumes. Exports are therefore going to surprise on the upside. The agricultural output side is looking better. People want to be cutting their forecast just past the bottom of economic cycle if I am right. Q: What is the case for a Cash Reserve Ratio (CRR) cut today? How strong is it? That is the one which would lead to some translation in interest rates from the banking system. Do you think it may come?
A: I certainly think it is more likely than a repo rate reduction. We certainly toyed with the idea of having a CRR cut. We did have a CRR cut before this latest blow-up in the rupee. So, I think it is certainly possible. Maybe a 30-40 percent chance is what I would give it. The key is that the commercial banks seemed to be pushing hard for it. They seemed to see this as the prerequisite to pass on more of the rate reductions. I presume the RBI does want some of these monetary easing to be translated into the banking system and to try and boost lending growth and real economic activity within the economy. So, it is more likely than a repo rate reduction, but probably less than 50 percent.