Brokerage house Tata Capital Securities does not rule out an interest rate cut in current fiscal year. They are of the view that even with sluggish investment demand, lower interest rates can stimulate index for industrial production (IIP).
Although interest rate effect may be less than seasonal forces, Anand Shanbhag, Head of Research at Tata Capital Securities believes that inflation and industrial production may soon surprise the market at large.
If there is a stronger conviction of a rate cut, investors should add more exposure to capital goods stocks, he says adding that consumer durable space will benefit most from an interest rate cut. Staying with the large caps in coming months may be a safer strategy, he says in an interview to CNBC-TV18.
Below is the verbatim transcript of the interview:
Q: Just reading your report about the real interest rates peaking and actually in turn reviving the IIP from here on. Can you elaborate on that?
A: We would really like to look at this story as something that we call internally as three eyes and our view is that inflation, interest rates and industrial production are now getting interlinked in a way which could present a few positive surprises for the market at large and investors. We believe that despite the very well founded concerns about the capital goods cycle not being upto the mark. A cut in rates if it does happen could actually revive IIP and that is the thing that I wanted to focus on.
Q: There was a lot of expectation of rate cut on December 2 but the deputy governor clearly put the RBI’s mind on display when he said that the markets are being ahead of the curve or way too happy too early about inflation. So if the cut doesn’t come say in December and in February and gets postpone to April, are you going to see a major hiccup for the markets at all?
A: The RBI has quite rightly warned particularly bond investors that they may be running a bit ahead of the curve and it is good to take that warning on record. But if you look at our hypothesis we believe that okay we have one date which is December 2 but we also have dates in between the regular policy announcements which would of course be linked to the inflation data that is coming out. I think there seems to be a lot of hope with caution so our call is that the hope has very good reasons to be out there and if not in the beginning of December, we wouldn’t rule out the possibility that you could actually see a cut even later in the calendar year. We believe there is a very good chance of seeing a rate cut because there will be new data that the RBI will review. Our call is that if you wait for may be the end of the fiscal year, there is better than 50 percent probability that you might actually see a cut beginning to happen.
Q: In that case how does that influence your stock selection predicating on a rate cut may be in the first quarter of next year if not this year itself?
A: The way we are looking at it is we are trying to see which part of the IIP basket is really most sensitive to rates and we found something very interesting. Our study internally found out that if you look at the IIP and just split it into two parts one of which is a consumer durables bet which is roughly 9 percent and the other one is a non durables which means it includes capital goods, basic goods and everything else more than 90 percent, the weakness is almost entirely concentrated in the consumer durable space for almost the past six-eight quarters.
More interestingly if you look at the non-durables space which is 91 percent of the IIP, you can actually notice that there has been a distinct upturn not very strong but if you compare the overall IIP which is languishing about 0.5-1 percent, you can notice a significant upward gap between that and the non-durables part which is about 3.5-4 percent. So our story actually is that we again went back and observed what is it that made the durables space behave so badly and it is in such a poor shape with minus 15 percent growth for the last quarter or so. We noticed a distinct correlation between the turning point on when the consumer durables part of the bigger basket started to move down and that completely coincides with the turning point in interest rates.
So our call is that if you were to indeed see another turn in the rate cycle and we believe it is likely but we will have to wait and RBI will decide. But if it does happen anytime in the next month to a quarter, the space that will clearly be most directly and immediately influenced will of course be the consumer durable space. It is really automobiles, household goods, auto ancillaries. So it is these parts of the economy that we expect will really begin to see that upturn before everything else.
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