Too premature to expect a rate cut, say experts

Disappointing most people, November inflation stuck above 9%. Inflation eased to 9.11% (MoM) versus 9.73 % in October. Most experts expected inflation to drop below 9%.

Experts believe the Reserve Bank of India (RBI) will not cut rates in the monetary policy on December 16.

Ina an interview to CNBC-TV18, Rajiv Anand of Axis AMC feels that the RBI will cut rates in April, assuming that the trajectory of both inflation and growth continue at the current levels.

Meanwhile, Vivek Rajpal, Rates Strategist of Nomura India said that the inflation would be somewhere around 8% after today's disappointing numbers and around 6.8% for March-end.

Here is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video.

Q: What do you have to say about this number and likely RBI action?

Rajpal: The 9% inflation number can have a sentimental impact. But, it is still a big downfall from 9.73% and it is well within the RBI expected trajectory. Inflation is as per their expectation. Growth is falling faster than what they expect. I would still assume that they will go dovish.

I never expected a cash reserve ratio (CRR) cut from them in the coming policy. They will continue with Open Market Operations (OMOs) slightly dovish than last time. They will probably say that if they continue to get a downward inflation trajectory, they will not hesitate in changing their stance to program.

Q: What will be the trajectory of the 10-year now? Will 8.35% will happen or will bond yields wait a bit before we start seeing any meaningful rise in bond prices?

Rajpal: The OMO support is holding on the bonds at the current levels. Given that, they are quite vocal about infusing liquidity into the system and yet treating CRR as a monetary policy tool. They will continue with OMOs and they will come with a scheduled OMO calendar in the coming meeting. Once they announce OMO calendar, we will see the 10-year reach 8.35%.

Q: What is your inflation trajectory from hereon? What are you expecting from the Reserve Bank?

Rajpal: The inflation trajectory is same as what we were expecting. The reading after this should be around 8% and March end reading should be around 6.8%.

Q: What do you make of this 9.11% inflation number and the fact that there is no letup at all in the manufacturing inflation trajectory? What would you expect from RBI?

Anand: The market expectation has been in the vicinity of about 9%, although there was a whisper number in the vicinity of about 8.3%. Relative to that expectation, these numbers are broadly in line. Our expectation from the credit policy is that it’s too premature to expect a rate cut.

We will probably see a rate cut in April, assuming that the trajectory of both inflation and growth continues at the current levels. We would like to see a continuation of OMOs to support the borrowing program and enhance liquidity in the system, and more importantly remove duration from the market that will be supportive for bonds.

Because we didn’t see an OMO announcement yesterday, the probability of RBI shifting towards a CRR cut in this policy or January looks a distinct possibility.

Q: What would your trajectory be for the 10-year? There were hopes that it would plunge below 8.4%, but no such luck is seen at this juncture. Do you see 8.4% as a bit of a resistance?

Anand: Technically, 8.4% has a bit of resistance. We have already rallied about 40 basis points on expectations that the interest rate environment has turned quite sharply. To that extent, it won’t be surprising if we consolidate in the vicinity of 8.4%.

Just a base effect will ensure that we would be somewhere in the vicinity of 7-7.25% as at March 31. As far as inflation is concerned, this will ensure whether the environment improves in the last quarter of the current year.

Q: The market was hinging on two things. The EU Summit perhaps would have given some bit of a year-end rally and then of course there were expectations that a changed tone from the Reserve Bank on the basis of an inflation number would help. Though one hope has already slipped, the other one seems to be far slipping. What would you project for the index? Will 4,700 levels get taken?

Anand: I don’t think the European crisis is something that will get fixed in a month or a quarter or even next six months. We will continue to see sort of hope and despair from Europe over the next three to six months. Accordingly, our markets will react as well. The macro environment in India is quite troubled. Even if we do get rate cuts, it is not so much because of inflation as it is a weak growth environment. To that extent, this whole cycle first needs to get played out of lower rates from the RBI, which will manifest in lower bond yields and so on. Even if the markets are expecting a rate cut sometime between now and April, it is just a first step to announce that the rate cycle has returned.

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