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Credit Suisse's Neelkanth Mishra: Repo rate still too high, scope for further cuts

Updated : October 07, 2019 03:35 PM IST

Credit Suisse does not expect significant weakness in the market but believe that as the pressure on the government keeps building due to weak economic indicators it will lead to earnings being pushed down, Neelkanth Mishra, managing director and India equity strategist at the company told CNBC-TV18 in an interview.

After corporate tax rate cuts announced by finance minister Nirmala Sitharaman last month, Credit Suisse expected that the market for coming several quarters would lurch between improving medium-term expectations as the government undertook tough reforms and very weak near-term prospects.

“We anticipated that the immediate reset because of corporate tax cuts would precede the cut in earnings, which would resume,” said Mishra.

With regards to their portfolio approach, he said investors have to find places to hide. “One thing is reasonably sure, given that we have reached an environment where inflation is not likely to flare up anytime soon although there could be short-term spikes created by onion prices etc but sustainable MPC [The RBI's monetary policy committee] is projecting all of FY21 3.5-4 percent [repo rate]. It is safe to assume that those numbers will be met,” he said, adding that in this environment the interest rates would likely remain lower, so that would be one place to hide.

IT space could also be a place to hide along with large private banks, he said.

On credit availability, he said that it has been a worry for the last one year and there is a problem of credit availability in the economy and until that is addressed do not expect economy to bounce back sustainably. “The aggregate credit supply in the economy is a problem and we have also been saying through a public researched note since February-March this year that there is a problem with supply of money in the economy,” he said.

“There can be restocking based adjustments that can happen and some of those could start happening in the next 2-3 months but I don’t think we will be able to grow anywhere close to where we want to grow till we have corrected capacity issues in the financial system,” he added.

According to Mishra, there are solutions to address the credit availability problem by bringing down the cost of debt to improve demand and also make changes on supply side to improve availability of credit.

When asked about the health of tier-II lending system, he said large parts of the financial system is quite healthy although the problems are quite serious. These problems in the system will remain a headwind to growth, said Mishra, adding that drawing comparison to the 2008 Lehman crisis is not appropriate. “Our system is far safer than what the financial system was in 2007-08 globally,” he said.

According to him, the real repo rate is still too high and has a scope to come down, then the term premium which has scope to come down and the credit spread also has scope to come down. “We need to accelerate this process, we need to give comfort to the financial markets which currently do not trust the ratings put out by the rating agencies that these are the safe firms and these are not so safe. Once that process which make take 3-4 months, we can start a much healthier recovery,” said Mishra.
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