Will the RBI go for a rate cut?

While the world is awaiting the big one from the US Fed, back home, the case for a rate cut on September 29 is only being strengthened after CPI inflation in August slowed to 3.66 per cent, well under the RBI’s target of 6 per cent. The big question is — is the RBI now being nudged into a bigger rate cut or a definite rate cut on September 29? Bloomberg TV India caught up with Jayesh Mehta, MD and Country Treasurer at Bank of America, to get a sense of the sentiment.

The August CPI inflation printed at 3.55 per cent. The bets are on for a September 29 rate cut. But the big question is: is it the last of the lot that we will see? Is it just an obligatory cut given the fact that CPI is so low? Because the camp is still divided on whether we should see an aggressive cut from here on or we will still see the piecemeal cuts from the RBI…

Yes, I completely agree. After Monday’s CPI inflation numbers, a lot of economists are kind of saying that an interest cut is the last they would look at. They are all going by the same thing, may be with Monday’s inflation number. The January-March inflation may be coming at 5.5 per cent. With the RBI’s stand of real rate of interest at 1.5-1.75 per cent, this would be the last obligatory cut. That is the general view across the market, mainly from the economic side.

But, I think I am not in that camp. I would still look at some aggressive cuts, may be from here to the financial year end. I am looking at an at least 50 basis point cut.

Now, whether that happens on September 25 or later on, that’s a different story, but definitely looks like at least a 50 basis point cut is in the offing.

The big argument will always remain: can rates really do anything for food inflation? So, why target the CPI, which has a 50 per cent basket of food, where your repo rate has really nothing to do with direct implication except for inflationary expectation? My question is, is there a possibility that the RBI Governor can now start looking at the medium-term goalpost of 4 per cent — and use that as a deflection point for keeping rates near these level?

I think the RBI has all the prerogatives and they can justify whatever move they do. From that perspective, we can’t really predict what they will do but if you look at the trend and if you look at the past, the goalpost for March 2016 is 6 per cent and you are looking at that at 5.5 per cent.

Even if you look at what the RBI has been saying, your pure focus has to be targeting inflation. In that situation, irrespective of what happens in the US, you need a 25 basis point cut. So, I think from that perspective we can only go by the past trends. If something new comes, of course, that would be a surprise.

One is of course the policy rates. The second is — one has to see what is happening across the globe; what is happening to the commodity prices, oil prices, as well as what is happening to credit demand, especially in India. There is no real credit demand coming in.

So, the rates transmission will definitely happen. So, from that perspective the bond yields look very constructive, very attractive at this level and there may be a follow-up rate cut later on. So, I am of the view that a 25 basis point rate cut is definitely a given, irrespective of what the Fed does. Maybe a sharper rate cut would come at some point of time.

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