India needs big interest rate cut, minor cut won’t work, says star equity strategist Neelkanth Mishra

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Updated: March 27, 2019 8:10:34 PM

Amid slowdown concerns all across the globe, India too needs to gear up to fight the sluggish demand, and an interest rate cut is one of the answers to give a boost to the overall economy.

Amid slowdown concerns all across the globe, India too needs to gear up to fight the sluggish demand, and an interest rate cut may be an answer to give a boost to the overall economy. There is a need for a bigger rate cut to provide stimulus for growth and minor rate cut won’t work, Neelkanth Mishra, Managing Director and India Strategist, Credit Suisse, said in an interview to CNBC TV18, ahead of the Reserve Bank of India’s monetary policy committee meeting scheduled next week.

The money supply ratio to Gross Domestic Product has lagged for almost two years and after the NBFC crisis in September, the credit creation actually stalled and it will take around three to six months for NBFCs to resurrect, Mishra said.

“Rate cut is the solution, minor cuts wouldn’t work. Even though inflation has rebounded to 3.5%, still there is adequate room for a rate cut. Once the new government is in place after the July budget, I think some stimulus will be available,” he said.

The Reserve Bank of India had last time cut repo rate on February 7 by 25 basis points to 6.25% amid benign retail inflation and a slowdown in global growth while changing the policy stance to ‘neutral’ from ‘calibrated tightening’. According to market experts, there is a scope for a further rate cut to give impetus to growth. The monetary policy committee headed by RBI governor Shaktikanta Das is meeting next week to decide on policy interest rates.

While there has been a capital infusion of over Rs 1 trillion into public sector banks this year, PSU banks need to start lending. It’s the small and medium sector which is not getting a loan. The banks tightened themselves after loans to large companies began turning into non-performing assets.

The MSME sector is not likely to grow in the next three months till the bond market doesn’t start to function well and till the time aggregate credit growth does not pick up beyond nominal GDP growth, said Mishra. He added that the external capital gives comfort only on the currency side and the real solution lies in job creation, lowering interest rates, private investments and allowing businesses to invest.

“So the flows we are seeing is a classic sign of India being a low beta market, less integration to the world and with low rate expectations globally now, people are more tolerant of high PEs, which is why we are seeing so much of inflow from FIIs,” Mishra said.

When asked about the recommendation on portfolio allocation when elections are around the corner, Mishra said elections won’t have much impact on share market and going by long-term view he thinks, at this stage, it is a great time to be a private bank as NBFC s have slowed and PSU banks need to ramp up.

 However,  at some point, there can be some caps put on their margins and some concerns over their ability to raise deposits. He said the investment cycle is reviving and new investment is needed in steel, urban infrastructure, power distribution and transmission and he is positive about industrials.

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