Rupee's ill-health won't allow a rate cut today: CLSA

Any central bank, which is concerned about its currency, will not inject more liquidity, says Rajeev Malik of CLSA in the context of RBI policy meet schedule later in the day. Speaking to CNBC-TV18, he said this policy will likely maintain a status quo today and the apex bank won't go for any rate cut until July, that too if rupee stabilises. Rupee may get into consistent depreciation like pre-2002, he said

However, by July 30, one will have a good idea about Monsoon's progress, which will enable RBI to take a call; but that will not put growth into momentum, he says. "One or two rate cuts won't create magic," he says adding that the role of Reserve Bank in rate cuts is over emphasized.
Speaking on the FOMC meet this week, Malik said Fed chairman Ben Bernanke would emphisize on direction of tapering. It is given that the QE tapering will be a gradual process.

Below is the verbatim transcript of Rajeev Malik's interview on CNBC-TV18 Q: How high is the probability of seeing either a repo or a cash reserve ratio (CRR) cut today?
A: I would be very surprised if we see any action on either of those two parameters. I find it surprising that some people are talking about a CRR cut now. If you are any central bank that is concerned about the currency, the last thing you do is to inject more local currency liquidity, which is precisely what CRR does.
Investors, analysts perhaps have not paid adequate attention to some of the risk factors that RBI had fairly, eloquently highlighted in its May annual policy all about financing risks, any kind of reversal. So, it is going to be pretty much status quo, more of a repeat of some of the concerns it had expressed earlier. While everyone is fixated on this wholesale price index (WPI) inflation, RBI should try and anchor expectations that look there is a lot other stuff also going on and will fashion the monetary policy supply response function. Q: A lot of people are trying to leapfrog today's event and try and gage what happens for the rest of the year in terms of rate cut relief. Would you expect to see much more from the Reserve Bank of India (RBI) or do you think there is a bit of a clamp down coming down on rate relief?
A: I would be very surprised. There was a reason why the governor after the annual policy in early May highlighted very little room for monetary easing despite forecasting WPI inflation of 5 percent for March 2014. Some of these external risks that should impact in terms of how monetary policy is conducted are becoming more real earlier in time. Do not forget the context of both potential US dollar strength and higher bond yields over the next several months and this will be an adjustment process that will last for one-two years.
You cannot go ahead and try and get signal of aggressive easing. See what we have already suffered in terms of rupee debacle from foreign institutional investors (FII) debt outflows and has to be exceptionally careful. There is scope for a July rate cut if INR behaves itself but for a long-term I cannot understand this rather Diwali has arrived early view of the local bond market in terms of a series of rate cuts, I would be very surprised. Q: This rout on the rupee has had other kinds of impacts for us including what has happened with crude prices and the fact that Brent in rupee terms is up almost 8 percent. Do you expect them to say something more hawkish about growth or do you think they will wait for the trade deficit figures, they will wait to see how the monsoon pans out and then they will say their word?
A: By July 30, we will have a fairly good idea of how the monsoon has panned out while it had a good start. July is the crucial month and we have seen reversals in the past and so it’s better to take it easy rather than rush into it. But equally this fixation in India that one-two rate cuts from RBI will somehow do magic as far as growth momentum is concerned is rather misplaced.
The ball is very much in the government's court, they need to get their act together. To give them credit, they have certainly done some things but relative to the complexity of problems that the patient shows, the response needs to be a lot better and more effective.
_PAGEBREAK_ Q: The meeting that people are eying more carefully is the one stacked up later in the week with the Fed and so much turbulence in global liquidity, US bond markets and our own rupee. How crucial is that meeting and do you see a significantly different tone being struck by the Fed this week?
A: It is an important meeting. I suspect Bernanke will try and differentiate between a very gradual pace of tapering versus an outright increase, as far as policy rates are concerned that won’t happen until mid to late 2015, but tapering will be much earlier than that. It will be a gradual adjustment process. At the end of the day, the Fed has two choices. It can wait until it is late and then act in a move that could be potentially a lot more destabilising or partly because of anchoring market expectations and positioning those expectations, it starts earlier but does so in a very calibrated, cautious manner.
It is almost like undertake one move, see how things are undertaken in other move and during this process, if there is any scope or any possibility of a reversal as far as activity is concerned. They can always pause or even reverse. So, the direction is set, the pace, magnitude, timing are all going to be up in the air but the distinction in terms of tapering versus an outright increase as far as policy rates are concerned. The chairman will once again try and emphasise that message. Q: Do you think there is more upside given the direction that you alluded for the US bond yield? Do you see this current pressure on emerging market (EM) currencies, markets with large current account deficits (CAD) continuing in the near future?
A: You could see a very near-term respite but not a trend reversal. Over the next year and a half possibly two years, this is going to be the dominant theme which is why, even for the rupee, you could see a bit of relief rally in the very near-term. But I would not necessarily be wedded to it because I do think as this global adjustment takes place, it is going to be pay back time. Rupee is going back to the pre-2002 years of annual depreciation.
Rupee had a great ride between 2002 and 2007 partly because of this whole combination of weaker US dollar and the surge as far as global liquidity was concerned, we just had an easy ride, let the current account blow out and now it is going to be a bit of a payback time. Rupee's problems are not just two weeks old, people overlook the fact that rupee has depreciated over 30 percent since end 2007. It is the second or the third worst performing EM currency. Q: Part of the premise stepping into this year was also that the second half would see far better growth prospects globally and that would lift all boats including ours and seems to be getting a bit of a question mark as well. Are you getting worried about how growth actually has been in the second half and the ramifications for countries like ours?
A: A part of the idiosyncratic nature of the slowdown in India means that a lot is within our domain than necessarily external backdrop. As the external back drop improves, cyclical Asia will actually do better than domestically driven India.
Within India, the disappointment is despite some of the measures that the government has undertaken, the on the ground reality as far as the real economy is concerned is not improving much. Its common for some of the government officials to talk about how growth is picking up. I am not sure which economy they are talking about. So yes, second half could be slightly better but compared to six months ago, the magnitude of that improvement would clearly need to be tapered down. Q: If you were sitting in another country looking at various baskets of assets to invest in, would you say less and less there is reason to invest in a market like India both in terms of how poor the growth internals have been as also this currency issue which makes a big impact for people investing in dollars?
A: One of the more interesting aspects with India has been the dichotomy between the macro and the equity market. Straight off, compared to many of the higher risk emerging market currencies, India’s debt markets are not all that open. It is some amount of a perverse outcome that just when the government started to open these up, the global trade actually went sour. So compared to other markets, Indonesia for example, FII share of local debt is in excess of 30 percent.
In India it is not even 1.5 percent. So, equities still presents a better betting. Given that things are bad elsewhere as well but in India, in relative sense, they seem less bad. That will once again play in India’s favour to some extent. But it is best not to test the patience as far as FII investors are concerned. It is one thing to keep talking and quite another to deliver. Last September, talk would have been very helpful but now delivery is more important than mere talk.