“There is a definite slowdown. We are expecting a 50 per cent chance of a rate cut even as there is no change in inflation trajectory,” said Madan Sabnavis. CARE had expected the fourth quarter GDP
numbers to come at 6.1 per cent.
“Rate cut is a certainty now. I don’t think they will go for a 50 basis points cut, but there is a possibility of a 35 basis points cut with some liquidity boosting measures,” said Saugata Bhattacharya, chief economist of Axis Bank. Bhattacharya in the policy had said there was a chance of a cut, but now it has turned to a certainty in his calculations. One silver-lining though, according to Bhattacharya, there is a perk up in demand for consumer goods, even as auto sales definitely show a dip. “So, the slowdown is actually not structural,” he says.
Bank of America Merrill Lynch chief economist Indranil Sengupta, and Soumyakanti Ghosh, group chief economic advisor of State Bank of India, had already predicted a rate cut in excess of 25 basis points in the upcoming policy. Sengupta expects a cut of 35 basis points and Ghosh says the cut could be as deep as 50 basis points.
Joining the chorus is also Upasna Bhardwaj of Kotak Mahindra Bank. While she expects a 25 basis points rate cut, but “the chances of more than 25 basis points cut have increased after the GDP
numbers,” she said.
Rupa Rege Nitsure, group chief economist of L&T Finance
maintained that a mere 25 basis points cut won’t be enough this time around. More needs to be done, and if there is a rate cut of 25 bps only, it should be accompanied with a change in stance to “accommodative,” from “neutral”.
“A change in stance, along with a rate cut itself, would be a deep signal for the fixed income markets, which has already factored in a 25 basis points cut,” Nitsure said. Interestingly, the 10-year bond yields have fallen 30 basis points in May, and corporate bond yields are also finally softening, indicating that the market is factoring in more than 25 basis points cut in this cycle, the entirety of which may or may not happen in June alone.
The bond market was certain that the fourth quarter GDP
numbers would be below 6 per cent. Equity market participants were also expecting a weak fourth quarter growth data. As such, the now published data may not weigh on the market much but will raise investor expectations from the government and the RBI.
“The market mood is such that it will probably get over the weak GDP numbers. As this wasn’t entirely unexpected the investors may not be terribly concerned. The weak data will be a good input for budget-making. Most investors are now more keen to know what’s in store in the first week of July,” said U R Bhat, director, Dalton Capital Advisors.
“The RBI will also have to take steps to support aggregate demand. A deeper rate is quite possible. The central bank should also take steps to ensure the transmission happens more effectively,” he said.
Investor mood has been upbeat post the election results with benchmark indices hovering near their record highs. The Sensex on Friday had breached 40,000 and the Nifty went past 12,000, before settling lower.
In the last fortnight, the markets have rallied over 7 per cent, shrugging off global weakness, amid euphoria surrounding the election outcome. Some say investors could await concrete actions from the new government if they had to take stock prices even higher from current levels.