The consensus amongst analysts and economists is stacked
heavily against rate cut on 2nd December. However, the bond traders and
investors appear convinced of a rate cut.
This dichotomy is not unprecedented. It is often seen during
peaks and troughs of the rate and economic cycles.
More often the traders get it right. However, whenever they
are wrong, the losses are huge. Whereas economists and analysts usually have
not much to lose, should their expectations not materialize.
In the current instance, I am inclined to go with the bond
traders and expect not a 25bps but even 50bps rate cut on 2nd December.
This is nothing to do with the FM or industry urging for a
rate cut. I believe that under the current circumstance (credit demand growth 13%
and deposit supply growth at 17%) a 25bps policy rate cut will hardly make much
difference.
My premise for a rate cut is that it is perhaps the last
chance for RBI governor to create a cushion for a likely global crisis next
year.
With rates almost at the peak, there is virtually no scope
for rate hike should a global currency crisis warrant that. A 50bps cut now will
provide that cushion at virtually NIL cost as (a) The risk appetite of banks is
low and not likely to improve immediately; (b) inflation is falling due to
higher base and global commodity price correction and not likely to go up due
to lower rates; and (c) there is sufficient output gap in economy to absorb higher demand
without stoking inflation. These
condition may not be there 6-9months down the line
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