Talking to ET Now, Nilesh Shah, MD, Kotak AMC, says D-Street will be divided on rate cut. While on one side, they will be happy that RBI is focussed on inflation and eventually overall interest rates will come down over a longer period of time, a segment of market will also see to this as a data dependent central bank.
Edited excerpts:
Should markets be disappointed that RBI stuck to the script and it is only a 25 bps cut or should markets celebrate the fact that at least the RBI has been open to cutting rates even though the commentary is very bearish on inflation?
The Market was pricing in a 25 bps rate cut, not a 50 bps rate cut. A 50 bps rate cut meant that the rate cut cycle would have come to an end. A 25 bps rate cut means that there is always a possibility of another 25 bps rate cut. So market will look forward to the press conference of RBI Governor. They will look to read between the lines of RBI statements and my guess is that they will be hopeful that there is a rate cut potential in the next six to 12 months. That that should give them sufficient anchor to kind of hold on to current levels.
What is your own assessment? What do you think he has told the street? Has he told the street that the RBI continues to be very hawkish around inflation? Even though they are talking about factors like core inflation dipping and rainfall being bountiful, GST being smooth, the fact is that they still are worried about inflation and are still obsessing over prices. What is the street making of the governor’s commentary?
The street will be divided. On one side, they will be happy that RBI is focussed on inflation and eventually if they establish their credential as inflation hawks, overall interest rates will come down over a longer period of time. I mean, if they achieve that 4% inflation target. then clearly the real interest rates of 1.75% will be too high and they will have to reduce it later rather than sooner.
On the other hand. a segment of market will see to this as a data dependent central bank. Clearly they are willing to discount the impact or HRA which is transient or one time in nature. They are also trying to differentiate core inflation by saying that inflation without food and fuel has fallen substantially. So my guess is that overall market will remain a balanced view, the data will determine the course of RBI. There is room for rates to go down but that expectation is now a little bit delayed rather than front ended.
The currency has been very strong this afternoon. Plus what is happening with the bond yields and the reaction of a stark rise in the 10-year benchmark yield post the rate cut, how do you rationalise it?
The bond yields are probably just a short term reaction and it will start stabilising. There is a tremendous amount of FII buying which we have seen in this calendar year almost close to Rs 70000 crore in gilt and Rs 70000 crore in corporate debt. That flow is reflected into rupee strength and clearly RBI’s intervention in the rupee market is limited courtesy the huge liquidity which is prevailing in the system and the bond yields are a transient reaction to the policy statement where certain portion of the market will believe that rate cuts now are no longer possible but better senses will likely prevail tomorrow and we will see rates stabilising.
Market sentiment is driven by policy accommodation, that stance has not changed. There has been one rate cut and what you just stated that the window of opportunity for another rate cut does not look as clear as one had anticipated before this policy announcement, then what does the market take away from this policy move?
At least from the equity market point of view, commitment of RBI to control inflation and manage inflationary expectation will anchor them. Over a longer term basis, if RBI does indeed contain inflation, the potential interest rate drops or potential interest rate cut increases. The equity market, unlike debt market, will take solace from the longer term inflation commitment and they will continue to believe that the future of Indian interest rates is on the lower side and not on the higher side. This means there will be better corporate earnings and better valuation discounting. So both debt and equity market will take a different time period view of interest rates; debt will take a short to medium term, equity markets will take a medium to long term.
