Expect RBI to deliver another 25-bps cut before April meeting: Jahangir Aziz, JPMorgan

In a chat with ET Now, Jahangir Aziz, JPMorgan, shares his views on the latest interest rate cut by the RBI. Excerpts:

ET Now: Are you surprised by the rate cut this morning? Or would you say the rate was not all that surprising?

Jahangir Aziz: Actually, we put out a note just after the inflation numbers came in. The numbers were a surprise on the downside, and we said that it opened up the possibility of an earlier rate cut. We also made a case for two 25 basis points of rate cuts rather than one 50 basis points cut.

So, the only surprise for us is that the cut came in perhaps a few days early.

ET Now: Do you see any further rate cut before the Budget?

Jahangir Aziz: The Reserve Bank has been facing a lot of heat in terms of not moving on rates. The heat tends to come off a bit prior to the Budget.

If the budget is in line with expectations in terms of revenue expenditure, then they will deliver another 25 basis points cut. It will probably come after they have looked at the next inflation numbers, which come in probably around March 12.

ET Now: Governor Rajan is perhaps now acknowledging the possibility that the government’s expenditure print for the next fiscal will be a lot better than what he may have earlier envisaged. This is probably why he is reposing faith in the government by way of this out-of-turn rate cut. Your view?

Jahangir Aziz: Much of this rate cut has been driven by the fact that inflation has significantly surprised on the downside. Even with base effect, inflation did not pick up as much as the market had though it would.

It goes on to show that the decline in inflation was strong enough for Governor Rajan to believe that government expenditure would be better going forward.

ET Now: What do you think the next three or four months hold in store because inflation seems to be on the way down?

Jahangir Aziz: If the budget turns out to be in line with what the RBI expects — revenue enhancing measures that keep the deficit target at 3.5% for this year and 3% for the following year — then Rajan will perhaps wait for the next inflation print. If the inflation data turns out to be supportive, then he will probably deliver another 25 basis points cut before the April meeting.