RBI delivers on growth, time to shift focus to structural reforms: Nilesh Shah

"It is not a bit of a surprise. It is a big surprise. After nudges in the initial power play, RBI has changed gears by front loading pro-growth measures. Both the bond market and the equity market has been positively surprised. The yields had gone down from 6.20 to 6.12 based on 50 basis point rate cut. It bounced back to 6.20 when they realised that stance has changed to neutral and again, it started coming down when the CRR cut announcement came," says Nilesh Shah, MD, Kotak AMC.


In cricket parlance, he has hit two shots which is more than the run rate which was required, you talk about CRR, you talk about repo rate cut, but he has also sent a googly in terms of change of stance. How should market interpret it?
Nilesh Shah: Well, after hitting two sixes, when the run rate is well under control, it is prudent to play the next ball cautiously rather than going for a third six, that is exactly what Mr Gandhi explained. RBI has frontloaded repo rate cut and liquidity measure to support growth. Now, it is time to be focusing on other parts of the economy, other parts of the banking rather than continue to give hope to the market that more rate cuts are coming.
I wanted to have your take on the markets as well because this particular move by the RBI, the markets are rejoicing the fact because Nifty Bank, look at the move, it is more than the 600 points of jump, getting into that all-time high zone; along with that Nifty 50, it is a double century once again, near to that 25,000 mark. Yes, it has been a bit of a surprise. But which sector can actually surprise on the upside because this news flow is indeed positive for banks, NBFC, real estate, and the list is long.
Nilesh Shah: So, it is not a bit of a surprise. It is a big surprise. After nudges in the initial power play, RBI has changed gears by front loading pro-growth measures. Both the bond market and the equity market has been positively surprised. The yields had gone down from 6.20 to 6.12 based on 50 basis point rate cut. It bounced back to 6.20 when they realised that stance has changed to neutral and again, it started coming down when the CRR cut announcement came.

Same thing happened in the banking sector and broad market. It came down when they heard repo rate was cut by 50 basis point as it would have impacted banks NIM margin, bounced back once they realised there is CRR cut happening. Overall, both debt and equity market will be positively surprised by this front-loading of growth measures. And now, actually, I have a worry, I hope President Trump does not borrow RBI governor to manage US Fed.


Help us understand the impact that you see of this surge in liquidity that will now eventually take place, the impact of that on the bond market. Do you believe the bond yield curve would flatten out because we did see a little bit of a spike coming in around 10:15 or so when the announcement was made about the surge in liquidity, where do you see the bond market headed from here?
Nilesh Shah: So, the bond market's immediate reaction will be to do a parallel shift down. The short, medium, long all will come down to reflect 50 basis point rate cut adjustment. Then, the short end may come further down because of the liquidity measures from having probably adequate liquidity or maybe if I can begin there was a time when there was excessive liquidity of more than 10 lakh crore in banking system, then it became adequate liquidity, then it became deficient liquidity, then it again became adequate liquidity, and now, we are probably at the stage between RBI OMO, the dollar swap, and the RBI dividend and CRR cut about 12 lakh crore of liquidity has been imparted into the system. Clearly, when liquidity improves, the short end comes further down. The spread between 10 and 30 year is 60 basis point yesterday evening. I am sure that is likely to narrow further.

So, we will see first parallel move down on yield curve, then short yield curve coming further down, and eventually long yield also, long end of the curve also coming down little bit.