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See only one rate cut this year: Kotak Mahindra Bank

With the February CPI and January IIP data due to be released in the evening today, CNBC-TV18’s Latha Venkatesh and Sonia Shenoy spoke to Indranil Pan, chief economist, Kotak Mahindra Bank to discuss his outlook on the trajectory.

Pan also discussed his view on expected rate cuts, and said that it would be very difficult for the central bank to cut rates once the Federal Reserve starts to hike, as expected, in June.

Below is the edited transcript of the interview on CNBC-TV18.

Sonia: What is your own expectation and what is the number which if it comes through can increase the chances of a rate cut in the April policy?

A: Our number is 5.2-5.25 percent. However, we are not really expecting a rate cut on the April 7 policy. We are more expecting the last rate cut in the June policy.

We are very clear about the fact that as per the communication of the Reserve Bank of India he clearly has pointed out that he is pre-empting the rate cut in terms of the long term trajectory of fiscal consolidation and supply side bottlenecks being removed out of the actions that might be taken out of the Budget.

Latha: Only one more rate cut? There were some people earlier today who were expecting 3 more rate cuts. You expect only one more?

A: We do expect one more rate cut. At best if you really push the governor hard possibly another sort of 25 basis points insurance cut can be due. However what we are clearly also looking at is if by June Fed actually starts raising interest rates then there is very little chance that an emerging market central banker would be actually sort of looking at reducing interest rates at that point in time.

That will have very significant implications in terms of the currency markets and something which the central banker might not like. So, therefore whatever rate cuts have to happen for India has to happen in the relatively earlier part of the year and before the Fed rate turns around.

Just as a side point, IMF actually believes that the 4 percent inflation target for India is really challenging and given the fact that supply side takes time to move it would be actually difficult to see the 4 percent coming in soon.

Sonia: What are the expectations on the IIP front? It doesn’t move the needle of the market too much, most of the data indicates that the slowdown still continues whether it is core sector, whether it is auto where there is no concrete pickup, capex cycle has not picked up just yet, what is your expectation and how long do you think this IIP number will be in the very low single digits?

A: The IIP base needs to be changed for a more realistic number in the current context. I think the organisations are working on that. Sticking to the current series, I think we are also expecting a 0.2-0.4 percent.

Going forward while we see some turn coming into the industrial production and the manufacturing sector per se, unless the supply side bottlenecks are removed and unless the fiscal actually takes hold in a very significant way on the Indian economy it could be actually difficult for the investments to move up.

Latha: What is your CPI for March?

A: It is very difficult to calculate the CPI given the new series because we really don’t have a realistic long series to actually track but having said that I think CPI for March is expected to be higher than the CPI for February simply because the oil prices in March have been relatively higher, petrol and diesel have been bumped up by 5-8 percent, ATF has gone up by 10 percent and all this will feed into the transport segment of the number on the CPI.

Plus relatively vegetable prices as of now in March are higher than in February. So, overall we are expecting CPI for March to be higher than February, whatever the February number comes out to be.


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