Good Mon­soon Will Pave Way for Fur­ther Rate Cuts

The Economic Times - - Money -

The Re­serve Bank of In­dia (RBI) has de­liv­ered a bal­anced mone­tary pol­icy, which opens up the pos­si­bil­ity of fur­ther rate re­duc­tions, says San­deep Nayak, CEO, Cen­trum Broking. In an in­ter­view to Saikat Das he said that the over­all pol­icy stance re­mains ac­com­moda­tive. Edited ex­cerpts:

How do you ex­plain RBI’s pol­icy ac­tions on Tues­day? Given that the over­all mone­tary pol­icy stance re­mains ac­com­moda­tive and Tues­day’s pol­icy com­men­tary too was largely bal­anced, the rate cut cou­pled with its liq­uid­ity eas­ing mea­sures should ex­pe­dite the process of eas­ing of in­ter­est rates. I would ex­pect the bond mar­ket to ini­tially cheer the move through eas­ing yields over the next 3-6 months. Once cor­po­rates see the ben­e­fit of this, and if the global situation too heals, eq­uity mar­kets should even­tu­ally ben­e­fit in sec­ond half of FY17.

Are mar­kets turn­ing too am­bi­tious about RBI rate cuts? Growth rate in­creas­ing to over 8% is the need of the hour. In­fla­tion is un­der con­trol, but in­dus­trial pro­duc­tion (IIP) is not pick­ing up. An eas­ing of the in­ter­est en­vi­ron­ment can boost man­u­fac­tur­ing growth. It is log­i­cal for mar­kets to ex­pect more rate cuts as the gov­ern­ment has stuck to its fis­cal deficit targets. Mar­kets are now de­bat­ing on the in­ten­sity of fu­ture rate cuts. RBI’s worry is that the trans­mis­sion of re­duced in­ter­est rates is not be­ing passed on to the end users.

With new liq­uid­ity mea­sures, will it now hap­pen? Banks are com­pet­ing with small sav­ings schemes where high rates have now been brought down. With small sav­ings rate down, cou­pled with RBI’s liq­uid­ity mea­sures, bank de­posit rates should come down, and along with it, MCLR-led lend­ing rates will also come down.

Will over­all low in­ter­est rate regime lead to an in­creased eq­uity mar­ket par­tic­i­pa­tion? Eq­uity as an as­set class should see more cap­i­tal in­flows in a fall­ing in­ter­est rate regime as in­vestors seek higher re­turns. This year, we ex­pect healthy re­turns from both as­set classes — eq­uity and debt. In debt, you can play the du­ra­tion strat­egy as fall­ing bond yields will push prices up. In­vestors can ob­tain mark-to-mar­ket gains. Does mon­soon pose a risk to mar­kets? Un­favourable mon­soon is al­ways a risk. If you look at our 150-year-old his­tory, we are for­tu­nate enough not to have three suc­ces­sive bad mon­soons. In­ter­na­tional weather fore­cast­ing agen­cies pre­dict that El Nino con­di­tions are some­what re­ced­ing and mak­ing way for La Nina con­di­tions, which are good for the devel­op­ment of the south west mon­soon. A good mon­soon will en­sure that in­fla­tion is un­der con­trol, and will pave the way for fur­ther rate cuts.

Why are eq­uity mar­ket pre­dic­tions fall­ing flat? The main prob­lem is that in­vestors set high ex­pec­ta­tions which were not met ow­ing to a poor earn­ings sea­son. Ad­di­tion­ally, two global fac­tors played a key role, i.e., China be­came a risk fac­tor, and there was a fear of US in­ter­est rate hikes. Due to fall­ing crude oil prices, sovereign wealth funds too had to book prof­its in In­dia, a move aimed at mak­ing good their losses in other coun­tries. All these fac­tors up­set equa­tions for the Sen­sex pre­dic­tions.

Can bank shares fall fur­ther? The March quar­ter will be the last quar­ter when banks will take the fi­nal hit. For in­stance, Bank of Bar­oda has al­ready taken it at one go. ICICI Bank and State Bank of In­dia may take it in two quar­ters. The worst should be ad­dressed in the fi­nan­cial re­sults of the quar­ter end­ing March 31, 2016, which are ex­pected to be an­nounced in the next few days. While there will be no fur­ther down­sides, credit growth and ex­pan­sion will play out for bank shares over the next few quar­ters. What are the top two sec­tors that’ll gen­er­ate good re­turns next year? Pub­lic sec­tor ex­pen­di­ture is an­nounced in roads, power and de­fence — we are bullish about it. Se­condly, the con­sump­tion-led sec­tors are ex­pected to turn around on ac­count of a re­vival in the ru­ral econ­omy and the Sev­enth Pay Com­mis­sion.

Where do you see Sen­sex this year? A lot de­pends on a good mon­soon. The ru­ral econ­omy will get a sig­nif­i­cant boost, and the Sev­enth Pay Com­mis­sion hike will also im­pact con­sump­tion. So, this can be one pos­i­tive trig­ger for the mar­kets. Nifty at 9000 and Sen­sex at 30,000 re­main a pos­si­bil­ity by De­cem­ber-end.

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