Rate Cuts If Any Will Likely Be More Rear Ended In Nature And We Expect No Immediate Gratification, Says Kotak's Lakshmi Iyer

A possible INR appreciation could act as an icing on the cake to reduce imported inflation.

Lakshmi Iyer

Dec 7, 2020 / 01:23 PM IST

"The revised projections seem credible given the Q2 GDP numbers which have beaten expectations. GST collections also have been quite robust and we are seeing pick-up in activity across sectors. Hence, we concur with RBIs projections on growth assumptions," Lakshmi Iyer of Kotak Mahindra Asset Management Company said in an interview to Moneycontrol's Sunil Shankar Matkar.

The Reserve Bank of India expects 0.1 percent growth in GDP in the quarter ended December 2020 and 0.7 percent in March quarter FY21, while the real GDP growth for FY21 is projected at -7.5 percent due to major contraction in first half of the year.

The central bank kept repo rate unchanged at 4 percent in the monetary policy meeting ended on December 4, while maintaining accommodative stance.

The President and Chief Investment Officer (Debt) & Head Products at Kotak Mahindra Asset Management Company feels not changing the accommodative stance and being on hold for a time period till we get to see a visible reduction in inflation seems to be the way forward on the policy front.

"Rate cuts, if any, would likely be more rear ended in nature and we expect no immediate gratification," she said.

The RBI had stated in the previous policy as well that the current phase of inflation is transient and they would look through it. Also the core inflation excluding food, fuel, pan, tobacco etc has been largely static since previous policy. Given this and the fact we are just at the cusp of an economic recovery, it would have been too premature to change policy stance.

Q: RBI revised growth forecast upwards. Do you think India can meet these RBI projections? What is your forecast for second half of FY21 and FY22, and what is the basis for the same?

The revised projections seem credible given the Q2 GDP numbers which have beaten expectations. GST collections also have been quite robust and we are seeing pick-up in activity across sectors. Hence, we concur with RBIs projections on growth assumptions.

Q: Majority of experts feel the inflation may remain elevated. Do you feel so, and why?

Headline inflation has been elevated largely due to supply side constraints. Prices of vegetables like potatoes, onions, tomatoes have been quite stubborn adding to the woes. Looking ahead, we could see some cooling off in vegetable prices due to the arrival of the winter crop which could ease inflation in the coming months. Base effect also plays a crucial role in pulling down inflation in near term. A possible INR appreciation could act as an icing on the cake to reduce imported inflation. We have also seen a sharp fall in gold prices, which helps in reducing inflation as gold is India's top 3 import items.

Q: Do you still expect the RBI to cut repo rate in coming policy meetings given its accommodative stance?

Accommodative stance to us means an extended pause. It is not necessary that accommodation always needs to be accompanied by rate cuts. Not changing the stance and being on hold for a time period till we get to see a visible reduction in inflation seems to be the way forward on the policy front. Rate cuts, if any, would likely be more rear ended in nature and we expect no immediate gratification.

Q: What are your thoughts on additional measures announced by RBI in December policy meeting? Do you expect more measures from RBI in coming policy meetings for banks and NBFCs, and for revival of economic growth?

RBI keeps announcing requisite measures from time to time to address various sectoral and banking related issues. The measures announced in the current policy is an attempt to strengthen bank balance sheets as also channelize money to the real sector. The move to add more sectors under TLTRO is also much needed respite to such sectors which had virtually no lines of funding due to the ongoing pandemic.

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