Stage set for 25 bps cut but RBI Forward Guidance very Important: Upasna Bhardwaj, Kotak Mahindra Bank

stage-set-for-25-bps-cut-but-rbi-forward-guidance-very-important-upasna-bhardwaj-kotak-mahindra-bankYour opening thoughts on how high is the chance for a rate cut right now, I mean we are pretty much going with a foregone conclusion that it will happen but at the very outset could there be a slim chance of wait and watch that the RBI could adopt in lieu of the global environment.

Well they could. One cannot rule out anything with the RBI at all but the rate cut should be very much on the card because the stage has been completely set, all the reasons that the RBI gave in the past for status quo have been virtually demolished. We have seen that GST has not been inflationary so far, the Seventh Pay Commission also has not been too bad. The monsoons have been good, commodity prices are low. But what will be interesting to see is the reasons that the RBI gives for cutting rates and what is their stance going forward because monetary policy acts with a lag of about three to four quarters and the more interesting point really would be what is going to happen subsequently to investment because it is not a magic wand. 

Right now, the cut in interest rates or the high interest rates is just one part of the missing link as far as investments are concerned. Investments are not looking up and as we have seen from the latest PMI numbers, business sentiment is still very downbeat. 
The RBI can only do what it can and expectations are high. I do hope the RBI will deliver and we will see a rate cut. The question is — can they a little bit more, can they make their stance or their statement a little dovish so that businessmen have the assurance that the rate regime is going to be soft going forward? 

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The only fly in the ointment perhaps or rather two flies is the global geopolitical atmosphere. It is far from conducive to taking risks. RBI might think that there is note of caution to be added on that front. The other factor is the asset bubble building up in the stock market. Clearly markets are hugely overbought. Whether the RBI will look at asset price inflation as well because even though consumer price inflation is clearly coming down, asset price inflation in at least one asset market is very high. 

Mythili Bhusnurmath : Do you think the RBI is going to be at all concerned about these two only minus points? As I see, there are only two factors that could possibly hold them back from cutting interest rates. It is almost a given but will the RBI attack some caution, a note, a caveat on account of these two factors? 

Upasna Bhardwaj : Definitely. Typically we have observed RBI to be quite cautious and conservative when it comes to delivering accommodative stance and that is where the worry is. Even if they do deliver a 25 basis of rate cut, how do they word their forward guidance and that is going to be very important. 

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Will they really try and maintain a slightly neutral or a balanced approach or do they really tilt towards dovishness and that is going to be very, very important and/or rather like you pointed out globally we are seeing a lot of political turmoil which could worry some of the MPC members and hence there could be kind of assigning a certain amount of caution to their tone. 

It will be very crucial to watch out on exactly these two fronts. I agree with you as well when it comes to asset price inflation that we are seeing that is also moving at a very rapid pace and globally even the FOMC has been talking about financial stability on that account. So, we will have to see how exactly RBI really watches these factors. Apart from that, domestically the stage is set to probably deliver a 25 bps of rate cut. It would be very,very interesting to watch out on the forward guidance and the kind of guidance that they really provide. 

Mythili Bhusnurmath: One aspect of an interest rate cut is to what it will do for the public sector banks say treasury profits. It should be a huge help. Many of our corporates, the larger ones are hugely overleveraged and interest cut will bring down their debt burden. These are two significant factors which perhaps the RBI will also keep in mind in further buttressing the case for an interest rate cut. 

Upasna Bhardwaj : Yes, precisely. There are arguments wherein people say that what will 25 bps cut do at this juncture, especially when investment is not picking up? This is the exact reason why we are not really seeing any sustained improvement in growth indicators. All the high frequency data that we have, do not suggest a sustained improvement. There are very mixed patches here and there. That remains a worry. Along with the fact that corporate balance sheets are overleveraged, this does at the margin provide a significant boost. I believe that some kind of monetary accommodation may be warranted at this juncture and hence how they deliver and what they talk going forward will be very crucial in defining the corporate sector’s confidence levels going ahead. 

Mythili Bhusnurmath: One of the things that we always want to have more of in India is forex flows. Of course, we prefer FDI but we are not going to look askance at FPIs also. If you have an interest rate cut, this will perhaps discourage portfolio flows from coming in but this is the time when we really have a surfeit. We do not want so much of money coming in from overseas because it has kept the rupee stronger than what it should be. That also will be a factor as far as the RBI is concerned because if you cut interest rates, the Indian debt market should look less attractive and to that extent it might dissuade some of the foreigners who want to come into India in search of a quick buck and then exit at the first sign of trouble. Will that also be a factor? How much do you think the strength of the rupee will impact the RBI’s decision making? 

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Upasna Bhardwaj : One thing we need to point out here is that the real interest rates in India are one of the highest in the world at the moment. Clearly India remains a lucrative destination for the foreign investors and even if RBI was to deliver say a 25 bps cut and sound slightly accommodative going forward — RBI has established its credibility of being cautious by nature in the past and hence we do not expect too much of an outflow from here. 

Yes, incremental inflows may get curbed but I do not think there arises a significant case for an outflow from these levels because, what happens is even if we were to see a rate cut there is limited room for rate cuts going forward. So, we would probably see at best a 25-50 bps or a rate cut in the cycle and probably we have a terminal rate of 5.75 as the repo rate. We are approaching the end of the cycle and in this context, I do not see significant risk of an outflow, but yes the incremental inflows may reduce.

Source: Economic Times