Expect another rate cut from RBI to boost growth: Sandesh Kirkire

The much awaited repo rate cut finally arrived on 29h January. This cut has not only come as a sentiment booster for the markets, it could also provide a direction change for the economy.

We remain optimistic that the Reserve Bank of India will gradually reduce rates to boost growth. In the first three quarters of the calendar year of 2013 (CY13), the economy grew at a languid pace of 5.3 per cent YOY. The growth in the manufacturing sector during the period was only at 0.23 per cent YOY.

Among other things, it was the high rate of borrowing (and savings) that provided a disincentive structure for the households and the corporates to consume and invest. Due to this, the rate of fixed capital formation in the economy, declined to 2.78 per cent in Jan-Sept 2012 period.

In contrast, the rate of average capital formation in last seven years (till date) has been at around 9.6 per cent YOY. Moreover, the growth in the private consumption expenditure in Jan-Sept 2012 too has moderated to 3.68 per cent YOY. (7-yr average at 7.56 per cent).

However, there are indications that growth moderation in the economy may be bottoming out. The capital formation rate in July-Sept 12 quarter was better than in Mar-Jun 2012. More importantly, the rate of change in inventory showed a growth rate of -0.12 per cent in Q2-FY13 as against the growth rate of -1.24 per cent in Q1 FY13.

This shows that corporate sector is increasingly choosing to expand its investment and inventory and improving business sentiment in the economy.

The economy would continue to gain strength from the repo rate cut. The increasing resolve of the government to curtail the fiscal deficit is also evident. The fuel subsidy reforms; and possible slashing of the profligate expenditure in the union budget, may help bring down the interest rates further. The tax accruals from the resurgent economy too may come handy in addressing the fiscal deficit.

The market may continue to remain observant of the indications and precursors provided by the key policymakers. The debt market may trade sideways with a bullish overhang in the run-up to the budget. The trend in the Indian equity market largely continues to be driven by FII liquidity inflows.

The key benchmark indices, Sensex and Nifty, witnessed an MOM growth of 2.41 per cent and 2.19 per cent respectively, during the last month. The total FII inflows in the spot equities market during January was a little more than $4 bn.

We believe that FII inflows may continue as the economy picks steam and the global risk premium, declines. This may lead to a more effective management of balance of payment.

SANDESH KIRKIRE
CEO, Kotak Mutual Fund

(This is a sponsored article)