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Bigger Rate Cuts, Liquidity Action Needed: Nomura

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The RBI will need to deliver more rate cuts to ensure the same level of policy transmission to lower the cost of funding and support growth," Nomura says in a report. If RBI wants to support growth, "then a 100bp reduction in lending rates, for instance, would require more than a 100bp cut in the repo rate," Nomura says. Nomura says the RBI has wanted the repo rate to "remain the operative rate," and has thus brought banking system liquidity into deficit to increase the effectiveness of India's main lending rate. Now that RBI is in easing mode, the tight liquidity conditions would mean longer lags in the policy transmission. Liquidity management has thus become a "top priority," so Nomura expects RBI to undertake more open market operations and cash reserve ratio cuts, or opt for a cut in the statutory liquidity ratio, to ensure "effective" policy transmission. Indian petroleum minister said in Vienna on Wednesday that a sustained $10 per barrel increase in crude prices reduces growth in developing countries by 1.5 per cent. Crude producers of OPEC are meeting in Vienna this week. "There could not be a more direct cause and effect relation than high oil prices retarding economic growth of oil-importing countries," Reddy said in a speech, a copy of which was issued to reporters by his ministry in New Delhi. India is the world's fourth-largest oil importer and its biggest suppliers are all OPEC nations -- Saudi Arabia, Iraq and Iran. The country's oil import bill rose to $140 billion in 2011-12 from $100 billion in the previous fiscal year as its average cost of imported crude rose $27 per barrel, Reddy said. On Tuesday, India reported its industrial output growth flatlined in April, piling pressure on policy makers to cut rates for the BRIC nation that Standard & Poor's warned could be downgraded to junk status because of political inaction. Standard & Poor's said on Monday that India could become the first of the so-called BRIC economies to lose its investment-grade status. This comes less than two months after the agency cut its rating outlook for the country. Since India's long-term sovereign rating is already ‘BBB-', just one notch above speculative (junk) grade, a downgrade will mean junk status for India's sovereign ratings. "Slowing GDP growth and political roadblocks to economic policymaking are just some of the factors pushing up the risk that India could lose its investment-grade rating," the ratings agency said in its report --`Will India Be The First BRIC Fallen Angel?' India's sovereign rating is BBB-, the lowest investment grade rating, and in April S&P lowered its outlook on the rating for Asia's third-largest economy to negative from stable. Goldman Stays Underweight On Indian Securities Meanwhile, Goldman Sachs on Wednesday recommended staying "underweight" in Indian equities on a three-month horizon as equities may slide further on the back of "a sluggish domestic and global growth outlook." However, it added that "the trough in NIFTY is behind us". Goldman also recommended staying "market weight" on 12-month horizon, says one-year target for the Nifty at 5,600 is underpinned by 12.7 times multiple on fiscal 2014 EPS of 438 rupees/share. "Equities may start to price a recovery in FY14 as well as a better external backdrop," Goldman says. Goldman favors Indian defensive and domestic demand-driven sectors and says to "underweight" global growth and investment-cycle sectors such as banks and commodities. NSE index, or Nifty, last flat at 5,117.65 points.