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India rate cut: expect more, say top fund managers

India rate cut: expect more, say top fund managers

India's central bank cut its benchmark repo rate by an unexpected 50 basis points to 6.75%, taking advantage of falling inflation to boost growth. Most experts had expected a 25 basis point cut.

Citywire Asia canvassed the views of some leading asset and wealth managers to find out what impact the cut will have on growth prospects and whether they expect any more monetary easing in the medium term. 

Rashmi Sadhwani, Coutts

Investment strategist

We believe further cuts are likely going into 2016, but these will be more measured.

We are keeping our long-held overweight on Indian equities. Those with existing exposure can stay invested.

At a price of 13.9 times expected earnings for 2016, Indian equities are the second most expensive in the region. But the premiums can be justified as return on equity (ROE) is above the regional average of 12%.

Those seeking fresh market exposure however may prefer to wait for better entry points over the next quarter as reform momentum may slow in the lead up to Bihar’s state elections.

Bihar’s election polls start in mid-October with results due on 8 November. Latest polls show Narendra Modi’s Bharatiya Janata Party (BJP) securing a majority.

Aidan Yao, AXA Investment Managers

Senior emerging Asia economist

While we thought a rate reduction was very likely (for both Sept and Dec), we did not expect the RBI to frontload the rate cuts.

The decision was designed to provide a bigger cushion for the economy against the global turmoil and rapidly receding inflation.

Barring substantial further shocks, we now expect the RBI to hold the interest rate for the remaining of this year.

Longer-term policy trajectory will be contingent on the central bank achieving its 2016/17 inflation target of 5%.

However, we think the risks on inflation are to the downside, given the continued impact of lower commodity prices and economic reforms removing supply bottlenecks.

We hence think the RBI will maintain an easing bias in 2016.

Leong Lin Jing, Aberdeen Asset Management

Investment manager

The 50bps policy rate cut was more than the market expected, and a welcome move. The RBI also announced a phased increase in FPI investment allowed into Indian bonds. Together, these moves should boost inflows.

The RBI has also left the door open for further rate cuts, given softening global growth and commodity prices.

But it is likely to be cautious until it hits its interim 5% and final 4% inflation target. That prospect should provide some support for bonds in the medium term.

Ajay Argal, Baring Asset Management

Head of Indian equities

In terms of impact, the Indian economy is not very leveraged -- consumer leverage isn’t high.

There’s leverage in certain pockets of the corporate sector but for these companies, this cut doesn't help because they already have some projects in the pipeline.

The rate cut won’t cause them to get new projects because demand isn’t that high. In fact, the capacity utilisation for the corporate sector is currently 70%-72%.

The impact of the rate cut will be essentially sentimental because consumers will be enthused by it.

It will be positive for private sector banks with a retail focus, mortgage companies and passenger car companies.

Angelo Corbetta, Pioneer Investments

Head of Asian equity

Domestic conditions are still supportive for further accommodative policy. Current inflation is at a bottom and well below the RBI January 2016 target of 6%. However, the inflationary outlook is not threatening this target.

The RBI has now explicitly shifted the target at 5% by the end of the fiscal year 2016/2017.

We do not expect any cuts in the current financial year but our internal Taylor Rule is calling for a further 75bps of rate cuts. It depends on the actions of the US Fed and the inflation outlook.

The monsoon season has been below normal expectations and we expect the winter crop to suffer as a result, putting pressure on inflation.  

We have been overweight India across our Asian and GEM equity portfolios.

We remain cautious on financials as net interest margins are likely to come under pressure and instead are adding to cyclicals sectors, particularly infrastructure related stocks.

Avinash Vazirani, Jupiter Asset Management

Fund manager

A tame inflation outlook suggests there is room for a further 50 to 75 basis point cut in the next six to nine months. With consumer price inflation running at 3.7% in August, the RBI, in our view, is unlikely to meet its aim, under its inflation-targeting regime, of achieving 6% inflation by January 2016.

This is due to two main factors – lower commodity prices causing competitive price cutting and Internet penetration making it easier for the average Indian to compare prices of goods and services.

The RBI’s decision to cut the statutory liquidity ratio (SLR) is also a welcome move. It represents a clear signal from the RBI that it wants to Indian banks to increase their lending.

A second measure to allow foreigners to buy up to 5% of total outstanding rupee-denominated federal government bonds, up from 3.8% should also further attract investors due to higher yields.

We remain confident about the positioning of our portfolios amidst the global volatility.

Kunal Desai, Neptune Investment Management

Head of Indian equities

There were two important details that have particular significance in the context of the RBI rate cut.

Firstly, RBI Governor Rajan has revealed that their definition of real rates has changed to the one-year T-bill minus inflation. He mentioned that 1.5-2% real rates would be desirable.

This means that from a rate cutting perspective, there is more to go.

Secondly, the RBI announced a much larger than expected expansion of limits for foreign investment in Indian bonds.

This amounts to a 5% increase of the outstanding stock and should translate to roughly $25 billion over the next 30 months.

These measures further open up and deepen the bond market, which is a big positive.

As and when the Fed begin their rate hike cycle, we believe India will stand out from other emerging economies as the only market that can stimulate its stock market with interest rate cuts.

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