Don't expect rate cut in Dec policy: UBS

Below is the transcript of Gautam Chhaochharia, Geoffrey Dennis and Edward Teather’s interview to CNBC-TV18’s Latha Venkatesh and Anuj SinghalLatha: There is a Reserve Bank of India credit policy and you very closely watch the Indian scene, what is your sense on what the RBI will do on December 2? Do you think the back of inflation has been broken in India?Teather: Looking at the RBI we don’t think the RBI will ease policy on December 2 but we do think easing is round the corner. We have pencilled in a 25 bps cut in the March quarter. We do think that inflation is going to come down on a sustained basis. Obviously we have had some pretty low prints in the recent past but we think the average rate of inflation through 2015 calendar and 2016 calendar is going to be a good bit lower than it has been in the last five years. So we think the economic conditions in India and government policy and RBI policy are in the process of breaking the back of inflation. Latha: So what would you pencil in? Next year if we met at the same time will rates be 50-100 bps lower? When will they cut first you think?Teather: We do think they will cut in the March quarter 25 bps and then 25-50 bps in the following few months. So at this time next year we think RBI rates would be 75 bps lower. The RBI isn’t going to rush into a major cutting cycle but market rates may move a good deal lower than RBI rates over the next 18 months or so. Anuj: What is the next big trigger for Indian market from here on, it has been a big outperforming market up 33 percent even in dollar terms, one of the best performing emerging markets (EMs)? Do you expect this kind of outperformance to continue and what would potentially lead this market higher from here on?Dennis: From my point of view relative to EMs overall, I just think it is one of the best stories that is out there in terms of the reform agenda, the potential for the economy to pickup, really excellent performance by the corporate sector compared to what you are seeing in a number of other emerging markets. So lot of markets have done well and lot of people are invested already in India. We would be very surprised if you don’t continue to get outperformance on trend. Obviously you will get pause, you will get profit taking by foreign investors at various times but we think it is a great market and we would expect it to continue to outperform. Bear in mind that is in a world where there really are some relatively poor stories in EMs where growth is a real challenge, corporate growth is particularly a challenge. So India is just doing what it is doing with the reform agenda and with the pickup in growth and the good corporate sector performances, it is really a standout and I would expect to see that to continue to lead outperformers within the EM asset class. Latha: In the last 24 hours the change in Japan, it looks like a second wave of Abenomics, elections called, more fiscal stimulus and a disliked sales tax being pushed back, all this on the back of some 80 trillion yen that the Bank of Japan will print. In the first wave of Abenomics some money got attracted away from other emerging markets. Could that happen at all?Dennis: That is a very big question. I think what you assume from the events in Japan over the last 24 hours, it does inject uncertainty into the situation. What we would presume now the election will lead to the re-election of the ruling party and Shinzo Abe to continue to be Prime Minister. But obviously that will create some uncertainty. I think the elimination over the next stage of the consumption tax is going to be good for the economy. But overall it does inject some uncertainty. We as a house is of the view that dollar is going higher over time. It will be perhaps not as rapidly from here on as it has done recently and of course that does tend to suck money out of the EMs. I don’t think EM money is going to Japan per se but a stronger dollar tends to suck money out of the emerging markets and therefore we need to really see whether this is going to be a weak yen move which doesn’t have to be that bad for EM or whether this is going to be a broad based dollar move which would pull liquidity out. So what this has done in the last 24 hours frankly is injected a bit of uncertainty into that. We have to see how these events play out politically in Japan and of course we need to see how events play out with monetary policy in the US which will be such an important driver of liquidity flows in 2015. Anuj: Do you think there is a risk of India getting over owned in the emerging market funds with the kind of outperformance we have already seen and with the kind of outlook that we have for Indian market. Is there a risk of an over ownership and making India a bit vulnerable in case strong action does not come from the government front? Dennis: I think it is over owned now frankly. We have met some investors who are very highly overweight on India compared to the benchmark. But I also think that some investors have been reluctant to buy in recently because the valuations have been so high. This is a great story and there will be more money to come. So in the event of a piece of negative news on the domestic front, yes you could see some heavy profit taking but I think it is an overweight that is going to stay an overweight and it is probably going to bring more money into the market. So we should focus on that because this is a really good story by global emerging market standards.