Moneycontrol
Last Updated : Oct 05, 2016 01:23 PM IST | Source: CNBC-TV18

Can expect significant incremental easing: Mizuho Bank

There is a definite scope for further easing even though the monetary policy did not specifically mention about it in its statement on Tuesday, said Tirthankar Patnaik, India Strategist at Mizuho Bank.

There is a definite scope for further easing even though the Reserve Bank's monetary policy did not specifically mention it in its statement on Tuesday, said Tirthankar Patnaik, India Strategist at Mizuho Bank.

RBI lowering the real rate to 125 basis points leaves significant scope for further easing, he said. "Going forward in the monetary policy report, we notice that they are looking at a 4.5 percent figure for March 2018 and now on 4.5 percent you put a 125 bps real rate gives you 5.25 percent on the policy which essentially means that even from current levels you still have another 50 bps to go over the next year in terms of incremental easing," Patnaik added.


Below is the verbatim transcript of Tirthankar Patnaik’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.

Prashant: You are in a good position to kind of make sense of the macros and markets as well. In your earlier avatar you were very hands on with market sector, strategy etc. So, tell us this 25 bps cut that we have got how will that change the perception of what the market will expect from the Reserve Bank of India (RBI) and the cost of money from here? Does it change expectations quite a bit?

A: The key takeaway was that the RBI now looks at a 125 bps real rate as opposed to 150-200 bps real rate anticipated real rate which was the case for the last 2-3 years. So, this lowering of the real rate does leave significant scope for further easing. So, to the market while part of the consensus did wish and hope for a rate cut the rate cut did come through. Importantly are we looking at further easing and from that perspective at a 125 bps real rate and by inflation going to five percent by March 2017 and 4.5 percent by March 2018 these are RBI numbers we could be looking at a significant incremental easing from current levels. So, to answer your question in terms of the market there is a definite scope for further easing even though the policy did not specifically mention any such comment but there is scope for further easing and that should enthuse the market going further and should have implications for cost of funds going down further as well.

Ekta: When you say significant incremental easing or room for significant incremental easing how much are you pencilling in terms of further rate cuts?

A: So let us do the math. According to the RBI's monetary policy report yesterday they have maintained a five percent figure for March 2017 where they say that the risk is on the upside but albeit not as much as we saw in the August policy. Going forward in the monetary policy report we notice that they are looking at a 4.5 percent figure for March 2018 and now on 4.5 percent you put a 125 bps real rate gives you 5.25 percent on the policy which essentially means that even from current levels you still have another 50 bps to go over the next year in terms of incremental easing.

Prashant: The market perhaps would look at 50 bps amplified to 100 bps in its mind, corporates even more. It is essentially what it does to the perception of how much room there is, that is what drives market, perception more than reality.

A: Absolutely, so the markets would obviously amplify this to maybe 100 bps. 50 bps is what the RBI is saying they will do if things worsen further, if we do not get the kind of recovery we are expecting going forward and by the way there are growth implications also on the RBI's lowering of this real rate. This is the rate that the RBI says is now in consonance with changed growth dynamics on growth, on savings-investment gap and therefore there are indications that the easing could be even further than what we have seen and of course for the markets the expectations would definitely be higher. The key point of course remains as to would the RBI frontload it because the policy yesterday given the commentary did make it seem that the RBI is now quite willing to frontload its anticipated easing and therefore for the market that actually acts as an icing to the cake. One, you are going to see further easing and second, you might actually see it frontloaded.

Ekta: A quick answer on the yields. It has softened 8 bps post the policy. At current reckoning how much lower do you expect it to go?

A: With the new scope for rates to go down yields can go down to 6.5 handle as well. We believe that by the end of the fiscal or in the first quarter of FY17 you might see a 6.5 percent 10 year number.
First Published on Oct 5, 2016 01:22 pm
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