Good Monsoon Will Pave Way for Further Rate Cuts
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.