Rajan not been behind the curve on rate cuts: HSBC's Paul Mackel

Outgoing Reserve Bank of India Governor Raghuram Rajan attacked critics of his monetary policy stance saying the interest rates the central bank had set during his tenure were not too high.In a speech, Rajan challenged them to show how inflation is "very low" before accusing him of "being behind the curve" in his focus on containing price rise than on growth and debunked such criticism as mere 'dialogues'.Paul Mackel, Managing Director - Head of Asian Currency Research at HSBC, agreed with Rajan's views, saying that he does not think the central banker had been behind the curve in cutting interest rates.Mackel told CNBC-TV18 that a final rate cut at Rajan's last monetary policy review is unlikely."We think the RBI will cut interest rates in the fourth quarter of FY17," he said.Rajan took over in September 2013 at a time when the consumer price index was at around 9 percent and held the benchmark repo rate at 8 percent for about a year and a half. Mostly recently, inflation has fallen to 5.75 percent while the RBI started gradually cutting rates from early 2015 and brought it down to the current 6.5 percent.Below is the transcript of Paul Mackel’s interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Sonia: If you could give us your view on the rupee itself and what you expect as the trend for the rupee over the next couple of months? A: We still believe that the trend for the rupee is one of gradual depreciation. I believe that there is maybe some near-term uncertainty right now in terms of who is going to become the next governor for the Reserve Bank of India (RBI). But, still however, the rupee is in a much better position that many other Asian currencies or other currencies around globally. So, some gradual depreciation is in place. We are still targeting a view of 69 to the dollar come the end of this year. Latha: Since you raised the issue of the RBI governor, I wanted to ask you about this statement that he made to a few journalists that inflation is at 5.8 percent and we are at 6.5 percent. Where is this conversation coming in? This discussion keeps coming on being behind the curve without any economic basis. That is exactly the statement that he mentioned to journalists. Should this be seen as a fresh hawkishness on the part of the RBI or were you anyway expecting a cut in August? A: First no, we were not expecting a cut in August. We now think that the next policy move to lower the repo rate will be in the fourth quarter of this year. So, we were not in the August camp. Maybe there might be a little bit of caution at this juncture, highlighted by Governor Rajan, if you look at the way that headline consumer price index (CPI) is a little bit higher at this juncture. But still, we do think there is going to be some loosening monetary policy but not towards the end of this year. Latha: That entire conversation of Rajan is now available on the net. Anything in that statement at all that you would worry about? A: Actually no. I thought he was very clear in terms of his thinking about inflation and him talking about playing down the criticism about being behind the curve. I do not think that they have been behind the curve, I think that they have been operating with a fairly prudent sense of a monetary policy and that has also been reflected by that foreign institutional investors (FII) have been looking at this story too. Sonia: Coming back to the million dollar question then, who the next RBI governor will be. We understand that the head may be named in this parliament session itself that begins today and people have drilled it down to names like Urjit Patel, Subir GokarnGokarn or even Arvind Subramanian. At HSBC, what is the house view, who do you think would be appropriate to take governor Rajan’s legacy forward? A: We do not have a house view per se. We are well aware of the names that you just mentioned. I think there is no shortage of very credible candidates that come in and take over the helm from Governor Rajan. But I do think that story will continue to carry on and the Indian story is still a good investment story for global investors. So, hopefully, it will be a smooth transition and if that is the case then global investors will breathe somewhat a sign of relief and we can start to look more forwards growth fully recovering and just the implementation of Rajan’s policies over the last couple of years, that those continue. Latha: This coup in Turkey, is that going to cast any shadows on emerging market currencies as a whole? Will it impact equity flows into emerging markets at all you think? A: It is a good question. Obviously, it was quite a disruptive event on Friday, but the way that politics can influence financial markets, can be very abrupt in the short-term, but thereafter, markets start to calm down. We have been seeing that already today. Let us just bear in mind that we had the Brexit outcome just a few weeks ago and you say for emerging markets, based on how very well the currencies, the inflows into these markets, I do not see the Turkey story derailing that scene going forward.