RBI may cut rates by 25 bps in H2FY13: RBS

The downhill journey of the rupee continued even on Tuesday. The Indian currency touched all time lows of 55.06 a dollar, down 3 paise from the previous close of 55.03 a dollar. In an interview with CNBC-TV18, Gaurav Kapur, Senior Economist, Royal Bank of Scotland said that the weakness in the rupee is in sync with other emerging market currencies.

Pointing to the April-June session as a seasonally weak period for rupee, Kapur feels that inflationary pressure will persist and core inflation will remain north of 5%. When there is a strong debate on whether RBI intervention will ease the pressure or not, Kapur said that he does not expect the RBI to cut rates in the near term. However, a 25 bps rate cut can be expected in the second half of FY13.
Kapur also said that given there is a normal monsoon in the country, food prices will not move up considerably. He also anticipates some improvement in the current account deficit. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: First things first, which is the rupee. What's your view and your call at RBS in terms of how much more pressure the currency will face and what kind of targets do you guys have going?
A: It's very difficult to have a target at this stage. The burden of expectations and market momentum is against the rupee at this point in time. It's a larger move, it's a bigger move being driven by concerns about Greece exiting the euro zone.
The repercussions and the contagion could be fairly severe. I think it's to some extent overdone now, Greece is not going to exit in a hurry. It is something which will, if it were to happen and the probability of which has increased will happen in due course of time. We are not expecting that to happen this year at least.
You would see some stabilization in rupee at this point in time. I think RBI has been intervening consistently. They have been taking measures but I think it's very difficult to say how far it can go in this particular move. I think there is the down.
The risks are clearly on the downside and especially, between April and June you typically see weakness of the rupee even otherwise. I think the pressure can persist and on the downside perhaps you can see about 56-56.5 kind of levels for there is some correction.
But we don't think that at this point in time, given the kind of momentum, it's fairly difficult to pin-point and say this is where it can stop because it's a move driven by much larger concern. We have seen all other emerging market currencies weakening as well. Q: There seemed to be more crosses than checks though for the Reserve Bank before they get to their next monetary policy meet. Inflation stick was higher. The rupee has done what it has. They are already in fire fighting mode in terms of pumping in OMOs to get liquidity going in the bond market. What are the chances that they actually move on rates and what is it that you expect them to do in terms of rate cuts now?
A: I really don't expect them to cut rates. There is obviously no room to do that at this point in time. Inflation in the month of April was 7.3%. While the headline was definitely above the comfort level, the core inflation is still below 5%.
But I don't think RBI would be drawing in any comfort on account of that especially considering the way the rupee has weakened and any softness in crude oil price is getting negated by rupee weakness. I think inflationary pressures persists. There is still a fairly large element of suppressed inflation which has been worrying the RBI and they have been making that point time and again.
A 50 bps cut at the beginning of the year is enough for the time being. They will not be able to take off their eyes from containing inflation. I think it's going to be a more dynamic process of managing monetary policy. I don't think they will only be looking at what's happening globally. They will very keenly be looking at what's happening in the eurozone.
Actually, it will be interesting to get some assessment from the RBI as to what they see of the risks emanating from the zone because clearly if the problems escalate in the eurozone, we could see the pressure on the rupee and subsequently on rates by fairly large capital outflows. At this point in time there is no room for the RBI to cut. We do expect them to cut by about 25 bps, perhaps in the second half of the year.
But at this stage, they will continue to remain on the side of being hawkish and I think they have already provided enough accommodation in the current set of circumstances which they could for growth.
_PAGEBREAK_ Q: Couple of your peers like Morgan Stanley has cut the GDP estimates for India for FY13 and FY14. For FY13 they stand at 6.3%. Where is the estimate for RBS in terms of GDP and how high is the probability of a downside risk to that estimate?
A: We are looking at 6.8% for FY13 and the probability of a downside risk is fairly high. We are living in a world where the global economic environment is becoming very challenging. On one side you have the European economy where it's close to recession and it's now affecting the financial system again. On the other side the US is still really not out of the woods.
If the problems in the eurozone are worsened, it will have a negative impact on the US as well which would in turn have an impact on capital flows to India. We have seen the last round of investment cycle in India was very highly correlated to the global capital movements, especially the flow of global capital into India. I think the downside risks are getting stronger, especially coming in from higher inflation and persistence of higher inflation.
Despite the kind of pessimistic global economic conditions, we have not seen oil prices coming off sharply. For us, it will remain a source of discomfort throughout the year. Clearly the investment momentum and the investment pipeline is looking very weak. We are not seeing any actions from the government's side to address that specifically. We have seen bits and pieces. But there is a lot of confusion related to taxation now.
There is a complete policy paralysis or policy status which we see is continuing, given that the downside risks are fairly strong. On the other side I think rates are flattened out. At the same time, given a guidance of fairly normal monsoons this year, I think you will not perhaps see a spiral in food prices.
At this point in time the balance of risk clearly rests on the downside. While our headline is 6.8%, we will continuously watch how the situation goes. Q: How bad can the number on current account deficit look for India in FY13 because that’s been the problem area?
A: I think there can be some improvement in the current account deficit. FY12 was close to 4% of GD. In FY13, it could be around 3.5% perhaps slightly lower on account of slowing down of inputs, especially of gold inputs will be critical.
With overall slow down of the momentum in the economy even non gold inputs will have an impact. We will see some improvement in the current account deficit but, given our recent history the number will still remain on a higher side. We will remain closer to about 3.5% of GDP than say about 2.5%. I think that problem persists with high crude oil prices also.