Budget 2016: Positive for bond mkt; see one rate cut this year: Deutsche Bank

Following the government's Union Budget, expectations are high that the Reserve Bank of India cut interest rates soon -- and perhaps several times over the year.But Taimur Baig, Chief Economist, Asia Global Markets Research, Deutsche Bank AG says that while one rate hike is expected to be in the offing, more is unlikely to come.Baig puts his thesis down to the consumer price index, which, he thinks, is likely to look "okay but not great" through the year.He also said the central bank was unlikely to undertake an out-of-turn policy action.Arun Jaitley's Budget, he said, was positive overall and the fiscal deficit coming in on target would be good for FII sentiment, inflows and the bond market.Below is the verbatim transcript of Taimur Baig's interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.Latha: What is the sense you are getting? Are you disappointed that the Central Bank has not yet announced a rate cut after that excellent deficit numbers they got?A: I don’t see the urgency. I was taken aback by the heavy speculation in the market immediately after the Budget that here comes one more cut. There has to be some stability in monetary policy making. You cannot be the fastest growing economy in the world. However, generally speaking, Budget was a positive surprise in terms of the fiscal strategy but RBI has a meeting coming up in about a month's time.Reema: It will be a 25 bps cut in the month of April when they meet?A: I have been surprised in the past by the Central Bank's strategy, which is to frontload rate cuts. I don’t think there is sufficient ground for a frontloading type thing that they did simply because Consumer price index (CPI) inflation is fine but not that great. Core is stuck around 5, when we look at healthcare, education, those things are going up 5-7 percent, nothing in this Budget makes you think that those things are going down or stabilising. So, if I were the RBI and I had that 4+2 target in mind -- it is not that far away as far as the target is concerned -- I may fully confident that the band is secured. I wouldn’t be super confident.Latha: So is there one cut at least?A: Yes, at least one more cut. They are sort of cornered themselves for doing that as well as told them that you better stick to the line. So I think the ball does go back to the RBI's court and they do cut but beyond that I don’t know. There is a bit of a tension on this issue which is what does corporate India want? Does it want 25-50 bps or does it only want like 150 bps in rate cut. That I don’t believe is on the cards under any circumstances right now.Reema: If you do get a 25 bps rate cut, do you think it is already factored in into the bond prices because we have seen it come off from 7.86 to almost 7.6 percent. Today it has gone up a bit, the 10-year yield but what is your trajectory on the bond yield and if any rate cut comes through in April, do you think it is priced in?A: It is interesting that you mention the bond market. I think the bond market action reflects India specific factors much more than the equity market action over the last 36-48 hours because the pick up in Indian market prices virtually mirror everything that is happening all over the EM. So I don’t think the equity market was a function of what happens in to the Budget. The fixed income  markets certainly rate cut, fiscal attitude, benign view of inflation, all of those things have factored into this. Leading to the Budget, people like me were writing about the risk on the supply side, whether it is in Central government or the state government where we have all sorts of issues as well and we were worried about the Pay Commissions impact. So from that perspective, Budget was an unambiguous positive for the fixed income market.Latha: Where do you stand on growth? We were discussing at least couple of times in the past hour that this time the auto sales numbers look very good, just about every company, two-wheeler or even some of the four-wheelers and certainly the commercial vehicles (CVs) are reporting 60 percent growth, do you think the growth picture is looking more unambiguous now?A: The way we look at growth momentum, we look at retail sales and auto is the main input in that process but we also look at what is happening with trade, industrial production, capacity utilisation and so on and that suggests to us that growth momentum is slipped in the last two-three months, from October onwards we have slowed.So the upward momentum that auto companies are reporting is good news, hopefully the slide will be arrested and we won't see any further weakness but when we look at the totality of the data over the last four quarters, we are better today than we were one year ago, we are worse today than we were a quarter ago. So hopefully, the point that you are making is an early signal that further worsening is not going to happen but in terms of an upward sign, unambiguity not in my view.Reema: We have got a big scare last week when we saw the foreign portfolio investors (FPIs) pulling out money from the bond market. How has the picture been in the last two-three days?A: Around the Budget, we have seen inflows and that is good news that in the equity market that is some of the global data and the fixed income market that is very India specific. I think RBI's rate cut given the heightened noise in the media about it the day after the Budget and the day of the Budget, I suppose that also played into the flows, people want to get ahead of the trade. I don’t think there is any disappointment about that but rate cut is coming sooner or later. What is the difference between March 2 and April 2?