No action on rates unlikely to have big impact on mkt: IIFL
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No action on rates unlikely to have big impact on mkt: IIFL

22 May, 2017, 11:15 IST | Mumbai, India

The Reserve Bank of India has kept its key policy rates unchanged in the fourth bi-monthly credit policy review today.

Nirmal Jain, Chairman of IIFL , says the Credit Policy was on expected lines as there have been several indications by the RBI on this. Moreover, he does not see a rate cut this year.

However, Jain feels this was the opportune time to go in for a rate cut. "The global commodity prices are down, crude prices are down, core inflation is down. So you cannot have better than these circumstances to trigger investment cycle, which has virtually collapsed," he told CNBC-TV18.

From stock market�s perspective, he does not think the status quo on rates will have any major impact. He says the markets have already factored in no action on rates and have been looking for at more policy reforms.

Cautious on PSU banks, Jain says he will not take any aggressive position in them for the next two quarters as the SC�s coal ruling has put huge pressure on their asset quality.

He feels the 6.3 percent growth forecast by RBI is conservative in nature.

Latha: What have you made of the policy? What is your in-house economist telling you? When are you expecting the next rate cut and does it matter at all to the market in the near-term?

A: This is more or less on the expected lines because for last few weeks, we are going to be reading and there have been several indications by RBI that they will maintain status quo and rate cut will not happen. The policy or whatever has come is on expected lines because more or less I think through various sources RBI had already indicated their stance and what their intent was.

The way things stand today, rate cut may not happen in this calendar year, we may have to wait for next year but if you look at RBI�s policy commentary that has come, that non-food credit has reached its lowest level since 2001. So the overall credit growth has been less than 10 percent. I am of the view that this was an opportune time for rate cut, forget about stock market impact but the economy as a whole because global commodity prices are down, crude prices are down, core inflation is down. So you cannot have better than these circumstances to trigger investment cycle, which has virtually collapsed.

Also, S&P has upgraded the rating outlook from negative to stable. So this was a right environment to give impetus to growth but unfortunately RBI probably gives a lot more weightage to what they see as headline inflation number and within inflation also, if you see food and fuel have 60 percent weightage and food and fuel prices are absolutely not at all correlated with monetary policy, they have no impact whosoever of interest rate or tightening of monetary policy. So we have a policy direction and they are growth imperatives for the macro-economy but at this point in time, I think we will have to -- but there maybe other overwriting concerns which are about currency because you don�t want -- as it is rupee has been under a bit of pressure because dollar is strengthening and you don�t want to do a rate cut which can put further pressure on currency so that is one thing.

Secondly, deposit rates also - RBI would not like it to come down but rate cut is losing its relevance because there is no transmission in the actual rate of borrowing and lending. As you heard, a senior banker that already borrowers are able to put pressure on banks and get the rates down and counter impact of this will be on the deposit rates, they will also be brought down.

So to a large extent, the benchmark rates that RBI announces, we will lose relevance because the demand/supply for liquidity and money is dictating a downward pressure on rates and the yield.

Latha: The argument of the economists is on a different trajectory and their expectation is perhaps no rate cut from the RBI probably for another year. Let us take that as a given. I am just asking you should the stock market ponder about this at all. You are not going to get a rate cut for another 12 months and that is very possibly a base case scenario but you could get deposit rate cut as the bankers have been saying. So, what is the stock market impact is what I want to know?

A: I think stock market point of view rate cut not happening is not positive but stock market will be impacted by multiple variables and this is one of the small variables. I do not think this alone will decide the course of stock market for next one year. Market is looking forward to more policy decisions; market is looking forward to government taking some decisive action on coal, gas and the stalled projects. So, those will more than out way the negative impact of no rate cut and to whatever little I understand, I do not think it is given that there will be no rate cut for a year because if things change dramatically on inflation front, things change dramatically on economy front them RBI is going to have credit policy statement every two-three months. So one shouldn�t take it as given but that is a negative for stock market but as I said that there can be other factors which are far stronger than this and stock market direction cannot be just a forecast based on rate cut or no rate cut alone.