The RBI’s surprise 25-basis point repo rate cut on Thursday has led investors to believe that the cycle of interest rate easing has just begun.
‘25-50 bps cut possible’ Bekxy Kuriakose, Head — Fixed Income, Principal Mutual Fund, said, “We are now officially in a rate easing cycle and can expect further rate cuts if disinflationary pressures continue. Overall in the first half of calendar year 2015 we expect 25-50 bps rate cuts further.”
Others such as Tushar Pradhan, Chief Investment Officer, HSBC Global Asset Management — India, see it as a signal of confidence.
“This rate cut, while not significant on a basis point criterion, can be taken by the markets as a signal to a rate lowering cycle. This also signals a certain confidence that the RBI is showing in longer term trends on the fiscal front and a leading signal of a victory over the inflation dragon,” he said.
Earnings to pick up Nirakar Pradhan, CIO, Future Generali India Life Insurance, said the lower cost of borrowing would enhance corporate earnings. Lower cost of funds, improved liquidity, expected pick-up in capital expenditure and better earnings profile of companies would be positive for both equity and debt markets.
Pranjul Bhandari, Chief India Economist, HSBC Global Research, said in a report that losses arising from stressed loans of banks can be mapped to stalled investment projects. And in our view, this is why the RBI has predicated further policy rate cuts on the government’s effort to revive stalled projects and overcome supply constraints in the economy, the report added.
The onus is now on the government to not just revive capex, but also provide the space to the RBI for further easing.
Deposit rate cut Chetan Ahya of Morgan Stanley in his report said, “We believe that this is the beginning of a big rate-cut cycle. We expect a further 125 bps over the next 12 months, cumulative 150 bps in this cycle (compared with our earlier forecast of 50 bps rate cuts). From an underlying cost of capital perspective, we expect deposit rates, which have been running above policy rates, to decline by a further 175 bps to 200 bps (cumulative 200 bps, with banks having already cut deposit rates by 25 bps.”
Bubble factor However, experts are circumspect over the recent FII inflows. Daljeet S Kohli, Head - Research, India Nivesh Securities, said these flows will continue till the risk-on phenomenon persists.
They do not have any fundamental basis whatsoever and in case the European Central Bank does announce a stimulus by the month-end, there is a huge likelihood of strong flows to emerging markets, such as India, which holds the capability of creating a bubble.