Daily Voice: This CIO expects RBI to change stance to 'neutral' next quarter, says rate cut will have to wait

Ajit Banerjee, Chief Investment Officer, Shriram Life Insurance, thinks the Reserve Bank of India may shift to a “neutral” stance in the first quarter of FY25 if growth and inflation numbers are in keeping with its projections.

It may then consider a rate cut from the third quarter. In this calendar year, "we can expect a rate cut in the range of 25-50 bps", Banerjee, who has more than 29 years of experience across diversified sectors, said.

The RBI on February 8 left the repo rate unchanged at 6.5 percent and stuck to “withdrawal of accommodation” stance.

Banerjee said the only low PE, low valuation segment was the oil marketing companies. "We are seeing a lot of money being poured over there. This trend will continue for some more time," he told Moneycontrol in an interview. Edited excerpts:

Do you expect the RBI to cut the repo rate cut by 50-100 bps in calendar 2024 if inflation stays around 4 percent?

The focus of the monetary policy committee (MPC) remained on ensuring disinflation on a sustained basis in order to achieve their medium term inflation target of 4 percent. The RBI has enough space for holding the repo rate steady with its FY2025 forecasted GDP growth being quite strong at 7 percent in order to target the 4 percent inflation mark.

We can expect the RBI to consider a shift in its stance to "neutral" in Q1FY25 upon observing whether inflation numbers are nearing 4 percent mark, given that GDP growth numbers are also met. Probably then, the central bank may consider rate cut actions from Q3FY25 onwards. So, in this calendar year, we can expect a rate cut in the range of 25-50 bps.

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Do you think the RBI will stick to its inflation and growth forecast for FY24 and FY25 over the next couple of meetings?

The central bank remained optimistic on growth, pegging GDP growth for FY25 at 7 percent -- higher than consensus expectations. On inflation, the RBI marginally lowered its inflation forecasts for Q4 FY24 and FY25, estimating average inflation at 4.5 percent in FY25.

Although the central bank sounded cautious on both domestic and global-supply risks and highlighted that the last mile of disinflation could be the most challenging — necessitating the need to keep its stance at withdrawal of accommodation. Therefore, unless any of the underlying conditions have gone behind assuming these rates change in next two quarters, we can expect the RBI to retain these economic forecasts unchanged.

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Will capex themed stock take a breather in near term after the significant run-up in the past several quarters?

In this year’s interim budget, the government's focus has been on restoring fiscal consolidation and thus to achieve that, it has announced some targeted capex allocation.

The government’s sector-specific proposals largely pertain to supporting rural and urban housing, providing LPG connections to poor households, encouraging private sector investment in emerging areas (clean energy) through viability gap funding, higher outlay for energy transmission and  implementation of three major economic railway corridors.

At the same time, moderation in capex outlay growth is visible across the defence, fertilisers, railways, roads and urban infrastructure sectors.

Therefore, we need to see how the private sector responds to government's expectation of carrying out capex at their end. I would assume after the new government takes charge and presents a full budget, more clarity will emerge on this. Till such time we don’t expect significant movement in these stocks.

Do you think the risk reward is favourable in China?

Valuations of Chinese equity market are looking very attractive, it is below 9 times ie a discount of about 25 percent to the Asian market excluding Japan and discount of 55 percent to US market. Though there is lot of scepticism prevailing around the Chinese market and Chinese economy, many foreign portfolio investors have started showing interests in Chinese equity market as per a recent Bloomberg report.

So if there is an overall improvement in the confidence level of foreign portfolio investors, we can see some allocations flowing in from long term investors into Chinese equity markets.

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Are you bullish on the oil marketing companies and gas distribution companies?

The only low PE, low valuation segment available now happens to be the oil marketing companies and we are seeing a lot of money being poured over there. This trend will continue for some more time.

Presently in oil marketing companies and gas distribution companies, we are seeing a long-term adjustment in valuation. Generally, the overall expectation is that because of low oil prices, there is a great deal of flexibility when it comes to pricing and therefore, marketing margins will steady or may even go up for these oil marketing companies.

Apart from this, some of the past expansion projects in refining are going on-stream and that will add to the bottomline of the company. Refining margins still remain pretty much strong and some of this is brownfield expansion, so it will improve the productivity of the existing asset and improve return ratios.

However, if oil prices start moving up, these companies’ profitability is likely to come under stress.

Will the Fed wait for June to cut rates instead of March?

Fed chair Jerome Powell highlighted that inflation is “still too high” and that a March cut was unlikely, however, he admitted that the rate-hike cycle has reached its peak.

Hence, first Fed rate cut in March seems unlikely and may be considered in June policy meeting.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.