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There is room for more rate cut but core inflation is still high: Nilesh Shah

It is only the headline inflation which has come down and there is no room for complacency, says Shah.

ET Now|
Feb 08, 2019, 01.29 PM IST
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Across the world, central bankers work with the government and not against the government. If RBI does the same thing, why does it create doubts in the minds of people, asks Nilesh Shah, MD, Kotak AMC. Shah was talking to ET Now.

Edited excerpts:

Do you see the MPC’s inflation projection opening up room for another rate cut?

If inflation continues to remain under control and it has generally been below RBI’s own projection or Street’s own expectation. RBI is also focussed on inflationary expectations. Over last couple of years, inflation has come down but inflationary expectations have probably not yet come down as much as they should.

Today when we talk with the corporate India 7-10% salary revision is expected. In some sense, that is proxy for inflationary expectation. When inflation is subdued at 3.5% or 4%, why should salary expectations be higher at 7% or 10%? That gap has to narrow down. Probably that is where RBI has cut interest rates only by 25 bps and not more and they are keeping room open for more rate cuts if inflationary expectation starts coming down.

We also have to realise that our victory over inflation is very recent. Just a few years back, we were tackling double digit inflation. Now, we are tackling lower single digit inflation and within that, core inflation has been on the higher side. It is only the headline inflation which has come down. There is room for rate cut but there is no room for complacency on inflation as well as inflationary expectation.

What is your approach towards the market right now given that we could see some more rate cuts in this year itself?

On the fixed income side we run duration funds as well as credit funds. In most of our money market liquid, liquid plus, short term fund, we were running slightly longer maturity in anticipation of repo rate cut and will continue to run slightly longer maturity keeping in mind that in future also there is potential of a rate cut. On the duration fund we will be opportunistic because over here you have to not only play the curve you also have to play the security selection so here we will adjust our durations looking at what kind of opportunities are available in the market.

On the credit side of the fund we are generally more cautious on credit than let us say our peer group and will maintain that stance, we believe return of principle is more important rather than return on principle.

Is the governor following the sort of philosophy that the government has been advocating for quite some time now that monetary policy should be pro growth?

I do not think any western economist or western commentator had a problem when Ben Bernanke was going on a breakfast meeting with Hank Paulson every day during 2008 crisis. In fact, they were all appreciative how Ben Bernanke is supporting government and the US economy.

Even when Ben Bernanke talked about helicopter economy, where he talked about how recession can be avoided by throwing cash from helicopter, no one complained that he is bidding for the government, Every one appreciated the economist in Ben Bernanke.

Across the world, we have seen central bankers working with the government and not against the government. If RBI does the same thing, why does it create doubts in the minds of people and forget about nomenclatures.

Let us look at the fundamentals. Your inflation has been revised downwards. In the next 12 months, inflation is expected to be well below RBI’s comfort zone of 4%.
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