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Rule out inter-policy RBI rate cut; like IT: Mizuho Bank

The yuan devaluation by China’s central bank suggests the slump in commodity market is likely to continue as the country is the world’s largest commodity consumer. This, alongwith the fsall in global crude prices spells trouble for the Indian equity market, says Tirthankar Patnaik of Mizuho Bank.

In an interview to CNBC-TV18, Patnaik says Nifty and Sensex will be impacted by China’s yuan devaluation for the short-term atleast.

But the weakening seen in the Indian rupee was expected, he says, due to its sustained outperformance in emerging markets (EMs) basket.

The yuan devaluation and significant fall in rupee, apart from macro cheer in terms of inflation, has led to talks of an out-of-turn RBI rate cut. But Patnaik rules its out, saying if the RBI had to cut rates, it would have done it by now.

However, Patnaik is confident of a 25 basis points (bps) repo rate cut by the end of the year.

Below is the verbatim transcript of Tirthankar Patnaik’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: How have the Chinese devaluation turned things around? It looks like life is a lot more uncomfortable for commodity guys?

 A: Definitely, it is suggesting that growth in China is probably weaker than expected. The response of the People’s Bank of China(PBOC) to probably market reaction in letting the Yuan devaluate a little bit 1.9 percent to start with is showing that the pressure on the commodity is likely to remain and we believe that this situation is unlikely to change anytime soon.

Sonia: Yesterday there was so much excitement and expectation of a pre policy rate cut from the Reserve Bank of India (RBI) because of the way the inflation numbers have soften. Is that something you are pricing in as well and how should the market approach this trigger?

A: Our sense was that the prior to the events in China, prior to POBC devaluing the Yuan was that the RBI will take the first step only in the January to March quarter. While inflation trajectory has been on a downward glide path while food inflation has been fairly comfortable the sense was that RBI would wait for this uncertainty on monsoon to come off, the Fed rate hike uncertainty to come off before taking further decisions.

What has changed is crude has been going down continually and this event on the PBOC. My sense is that the RBI would probably accelerate the cutting in rates. We will probably see a rate cut before the year is out but we would rule out inter policy meets. They are largely event driven and if the RBI had reacted they would have reacted by now. Our sense is that they would not. Our sense is that devaluation in China if this episode doesn’t continue for long then the Central Bank would stick to policy meets for doing any kind of rate moments. We maintain that another 25 basis points in this fiscal is something that we would look for.


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