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Next rate cut by RBI unlikely before budget: Sanjay Shah, HSBC AMC

By ET Now | 17 Nov, 2015, 10.52AM IST

The WPI is reflecting what more tradable commodities are doing compared with the CPI, which is more about
services and so on, says Sanjay Shah, Head of Fixed Income, HSBC Global Asset Management. In an interview
with ET Now, he says RBI is unlikely to cut rates further till it gets to see the fiscal deficit numbers for the year
and budget numbers for next year. Excerpts:ET Now: First of all, I would like to get your initial thoughts on the WPI inflation data that has come in at
minus 3.81 per cent. How would you read this number?
Sanjay Shah: The WPI number has more or less come in line with expectations. In fact, last month's number has
been revised downward to 5.06 so it is in line with expectations. That is reflecting a sharp rise in food prices. A
large part in the WPI index actually comes in from commodity prices manufactured goods and so on. All these
prices are coming down. They are showing effects of the global meltdown in commodities. So really WPI is
reflecting what more tradable commodities are doing compared with the CPI, which is more about services and
so on. To a large extent, this index is going to affect corporate profits and that is something which would be
worrying companies at this point of time.

ET Now: You were mentioning about how the WPI is a worrying sign for what is happening to
manufacturing and companies at large. Would you expect at least 25 bps of a rate cut by the Reserve
Bank of India, because I frankly do not think the WPI or CPI have the arsenal to upset the applecart that
RBI would have wanted?
Sanjay Shah: The inflation numbers are going as per RBI's trajectory. So as of now RBI would not see any merit
perhaps in December to cut rates further. I would think that RBI would want to wait for the fiscal deficit numbers
to come in for the year and also the budget numbers for next year. Do remember that next year's budget target of
3.5 per cent of fiscal deficit is a little steep compared with the 3.9 per cent that government had set out this year,
so the steeper target, lower inflation affect the budget numbers as well, given that the inflation can actually help
the government achieve the fiscal deficit as GDP is growing at a faster rate in the nominal terms.
Lower inflation is not going to help the fiscal case. So RBI would want to wait and watch. Till that time, in the next
four or five months, they would also look at oil prices, commodity movements and so on and I think a call on rate
cut will be taken perhaps closer to the budget, maybe immediately after the budget next year.

n terms of trade deficit, the numbers are reasonable though the export numbers are a little worrying for the last
couple of months, in fact last couple of quarters, given that they have been slowing down due to the global
economic conditions. So those are continuing to be worrying for us. We would also be interested in seeing how
gold imports get impacted over the next couple of months because of the gold schemes for substituting the gold
imports and so on. That is one of the big factors in Ind ..
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Top 5 implications of RBI's 50

bps rate cut
The surprise cut by the central bank will have the greatest impact on home, auto and personal
Shishir Asthana | Mumbai September 29, 2015 Last Updated at 11:43 IST

RBI governor Raghuram Rajan finally did it. Call it political pressure or the need of the
hour, but a 50 basis points cut is now a reality.
Though the GDP target has been cut, markets are clearly rejoicing the sharp interest
rate cut, which is twice the general expectation of 25 basis points.
So what does this cut means to the various segments of the economy? Business
Standard takes a quick look at the top five implication of the greater-than-expected cut.
This, of course, is subject to banks following up on RBIs announcement and transmitting
the RBIs reduction in interest rates to borrowers and depositors.
1. Mortgage: Lower interest rates would directly impact all type of mortgages like
housing loan, car loan, and personal loans, among others. Lower interest rate is
expected to push demand in these segments, which will have a cascading impact on the
entire economy. Here the assumption is that the mortgage has been taken on a floating
rate basis. For fixed interest rate mortgages there is unlikely to be any change.
2. Savings: One of the first rates that banks generally cut when the central bank
announces a rate cut is in deposit rates. Banks do not want to take the risk of raising
high-cost funds at a time when the borrowing rates are falling. Saving rates, be it
a savings bank account or fixed deposit will go down from investors. Money markets
which are the first to react will see their interest rates fall.
3. Economy: In the recent interaction between the government and corporate India it
was pointed out that there are two main reasons why corporate India is not investing in
the economy. First was the ease of doing business and second were high interest rates.
Setting up capacity during a high interest era impacts the cost of the project and viability
of the project. Now with lower interest rates the ball is in the governments court to
announce policy changes in order to prompt corporates to invest.
4. Currency: Interest rate parity is the reason behind balancing of currency rates. Lower
interest rates will not attract capital which is looking for higher yields, which would mean
that the currency would weaken. If the Federal Reserve opts to increase interest rate the
differential between India and the US will reduce further, resulting in further flight of
5. Equity Markets: Equity markets are expected to gain on multiple reasons. First the
positive impact on consumption on account of lower interest rates would mean better

topline growth. Lower interest outgo would also mean high profit and thus better
valuations. Further, lower interest rates means that money will move from lower yielding
debt instruments to the equity market.

After steep rate cuts, RBI hands over baton to Delhi

When the Reserve Bank of India (RBI) cut interest rates by much more than expected this
week, government officials hailed it as a victory after months of imploring Governor
Raghuram Rajan for strong action. Now it is New Delhi that will need to deliver.
Rajan cut the key repo rate by 50 basis points to a 4-1/2 year low of 6.75 percent on Tuesday.
He expects that show of faith to be rewarded by government efforts to manage food inflation
and keep fiscal spending under control, said officials familiar with discussions at the Reserve
Bank of India and the finance ministry.
Fixing structural constraints that push up inflation could be critical in determining whether
the RBI considers easing policy further, these officials said, given government officials are
already pushing for even more rate cuts.
"The next crucial element is what the government does on the quality of spending, whether
there will be large capital spending, whether food inflation will remain anchored and fiscal
deficit goals will be attained," said one of the officials.
"The governor will watch all these developments very closely for the next six months."
While manufacturers have welcomed the rate cut, they say much more needs to be done making it easier to buy land, a more simple tax structure and flexible labour laws, are needed
to speed up corporate investments.
"Rate cut is good, but it alone is not a sufficient condition for companies to start investing,"
said M.S. Unnikrishnan, managing director of Thermax Ltd, an engineering company.
"For it (the rate cut) to have a material impact on the ground, other factors need to turn


The ruling Bharatiya Janata Party (BJP) has proposed legislation on land acquisition and tax
and labour reform, seen as critical to revive an economy that grew 7 percent in the April-June
quarter, well below the government's target of 8 to 8.5 percent for the year ending in March
But many of these measures have been blocked in the upper house of parliament by the

Still, the rate cut seems to have ushered better ties between the RBI and the government,
improving a relationship that has been rocky at times.
Although the RBI is not statutorily independent from the government, Rajan, like previous
RBI Governors, has long valued his independence.
And to the great frustration of government officials, the central banker had cut interest rates
only slowly this year despite a steep fall in inflation, with 3 rate cuts totalling 75 basis points.
That had made him unpopular among some quarters in New Delhi.
This time, the officials said, the RBI was persuaded by the government's call to help bolster
faltering domestic growth in light of the weak global economy and because consumer
inflation had eased in August to a record low.
But they said the RBI was equally swayed, and heartened, by government efforts to manage
food supply and its pledge to keep a tight lid on spending.
That gave the RBI more confidence about New Delhi's assurances that more measures would
be taken to douse food prices, building on earlier efforts such as managing the state's
stockpile of grains and allowing more imports of onions and pulses, all crucial barometers of
food inflation.
The government efforts also convinced the RBI that New Delhi could keep to its fiscal deficit
targets, now targeted at 3.9 percent of gross domestic product for the year ending in March
and 3.5 percent the next year.
"We presented our views and facts and they finally accepted it," said a senior government
official. "The case for a steep cut was very strong."