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'RBI need to cut by 100 bps in one shot'

By PRASANNA D ZORE
Last updated on: March 30, 2020 10:40 IST
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'Rate cut should reiterate RBI's commitment in providing confidence to consumers and small business.'

IMAGE: Reserve Bank of India Governor Shaktikanta Das, centre, with the RBI deputy governors. Photograph: Kind courtesy Reserve Bank of India/Twitter

"I believe RBI missed the trick by not cutting aggressively in one shot last year. Rather piecemeal approach of apologetic 25bps (0.25 per cent) rate cuts was taken," Amit Kumar Gupta, portfolio manager, Adroit PMS, tells Prasanna D Zore/Rediff.com. The first of a two-part interview.

Do you expect the RBI to get aggressive in cutting interest rates over the next three-four quarters, despite the fact that a similar exercise by the US Fed, has failed to elicit the desired outcome?

These are exceptional circumstances, no doubt. I think Fed decision is being linked to equity markets not able to sustain the bounce which may not be the correct interpretation.

Fed rate cuts and other stimulus measures is a kitchen sink, but confidence building measure for all stakeholders. They are saying we will support the market whatever it takes.

In that aspect, I believe RBI missed the tricks by not cutting aggressively in one shot last year. Rather piecemeal approach of apologetic 25bps (0.25 per cent) rate cuts was taken.

I strongly believe the RBI need to cut by 100 bps in one shot. They have already paused in December and Feb MPC (Monetary Policy Committee) meetings (which are held after every two months to decide upon the direction of interest rates among other things.

They have headroom to cut. They need to get the bond yields synchronised with other global central banks that are at easing path.

Rate cut should not be just a monetary policy tool, but reiterate the RBI's commitment in providing confidence to consumers and small business.

Food inflation has come down significantly from 13.2 per cent to 10.4 per cent and likely to come down more with good Rabi crop harvesting. Sharp fall in crude has given them extra cushion.

500 bps (5 per cent) buffer between India and US yields is likely to stay as (the US) Fed is committed to keep rates lower for longer.

Forex reserves are sufficient to control any volatility in rupee. They should cut aggressively now.

How is the 2020 financial market meltdown different from the 2008 meltdown? What are the salient features of the current market turmoil?

The sentiment on the street eerily looks similar to the one we saw during 2009, post the collapse of Lehman Brothers. In those days, the rumours of large banks declaring bankruptcy, sovereign defaults, imminent EU breakup, market freeze, sounded absolutely believable.

In India, many depositors transferred money from private banks to public sector banks.

Investors summoned their advisers for details of their liquid fund portfolios. The fixed maturity plans (FMPs) backed by bank CDs (commercial deposits) were pre-redeemed by paying penalties. Capital protected structured products were also called prematurely by incurring material losses.

I don't think this is anything like we witnessed in 2008-2009. Investors had pumped in huge money during 2004-2008 in Indian equities. This time they are huge net sellers during 2016-2020 period.

The earnings growth fell off the cliff during FY09 to FY11 period leading to de-rating of Indian equities. This time the earnings growth has remained anaemic and has little scope to disappoint materially.

In fact it may surprise on the upside from 2HFY21 (second half of fiscal year 2020-21; that is from Oct 2020) onwards.

India's economic growth has seen multiple downgrades in past two years, unlike 2008-2010 when the world had great expectations from India's economy.

Presently, the leverage in Indian stock market is significantly lower than the 2008-2009.

The current turmoil has come out of the blue, has been sudden and there is no one solution to tackle this. Every country has its unique approach depending on the spread.

How hopeful are you about the containment of current global contagion -- the Covid-19 as well as the financial meltdown -- in the context of measures adopted by the affected countries on both the fronts?

There are no easy answers. China with their super quarantine efforts are still struggling to get everything back up even after 7-8 weeks. It is likely to be worse for many other countries where the virus cases have not yet peaked or just peaking right now.

Social distancing and complete lockdown are the only solutions to avoid spread of the virus.

(The US) Fed (Federal Reserve) delivered a 'whatever-it-takes' policy decision approach with cutting rates to nearly zero and starting $700 bn QE (quantitative easing) to counter Covid-19. They also unveiled swap lines on signs of dollar-funding strain, opened the discount window for 90 days and cut reserve requirements.

Almost 40 central banks have cut rates, initiated/resumed QE and taken multiple liquidity measures to stabilise financial markets in this month itself. All this will work for a short time and will buy out time.

Finally, the disease needs to be contained. And how fast it is done depends on the medical solutions. Hopefully, we will get more people tested and quarantined on time.

The US 10-year Treasury yields are up almost a per cent, at around 1.23 per cent, despite the US Fed announcing near zero interest rates?
In addition, despite the US Fed going for another QE programme by announcing buying of US $700 billion of mortgage bonds, the credit markets are still in a tailspin.
How does one explain this behaviour of the credit market?

US 10-year yields have moved 100 bps down and then up, first due to risk aversion and then due to USD shortage as there was a funding squeeze.

Critical issue here is that there is still 15 trillion dollar shortage which is required by global central banks.

Many dollar swap line agreements have been signed by all central banks to cater to this requirement. It is still early stage and we have to see how the virus situation turns up.

With so many liquidity and monetary fiscal measures thrown in by everyone, credit market is in flux right now.

I have been tracking global markets and bond yields for over a decade and some of the yields and bond bids are totally bizarre. But it is clear that if the virus impact goes on too long, it is likely that traders and investors will have 2 options left -- cash or USD.

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PRASANNA D ZORE / Rediff.com
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