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Daily Voice: RBI may cut interest rates twice more before entering prolonged pause, says Naveen Kulkarni of Axis Securities

RBI Poised for Two More Rate Cuts Before Extended Pause: Insights from Naveen Kulkarni of Axis Securities

In the ever-evolving landscape of India's monetary policy, experts are closely watching the Reserve Bank of India's (RBI) next moves amid shifting economic indicators. Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS, has shared a compelling perspective on the trajectory of interest rates, suggesting that the central bank could implement two additional rate cuts before settling into a prolonged period of stability. This outlook is grounded in a careful analysis of inflation trends, global economic pressures, and domestic growth dynamics, painting a picture of cautious optimism for investors and policymakers alike.

Kulkarni emphasizes that the RBI's recent actions, including a surprise rate cut in its latest policy meeting, reflect a strategic pivot towards supporting economic growth as inflationary pressures begin to ease. He points out that headline inflation has been on a downward trajectory, influenced by favorable base effects and moderating food prices. This cooling trend, combined with a stable rupee and manageable external balances, provides the RBI with the leeway to prioritize growth without stoking inflationary fires. According to Kulkarni, the central bank is likely to deliver these two cuts—potentially in the range of 25 basis points each—in the coming quarters, aiming to bring the repo rate down to around 6% from its current levels. This would align with the RBI's mandate to foster a conducive environment for investment and consumption, especially as global uncertainties loom large.

Delving deeper into the rationale, Kulkarni highlights the interplay between domestic and international factors. On the global front, the US Federal Reserve's aggressive rate-hiking cycle appears to be winding down, with markets anticipating a soft landing for the world's largest economy. This could alleviate pressure on emerging markets like India, reducing the risk of capital outflows and currency depreciation. Kulkarni notes that if the Fed opts for rate cuts in response to any signs of US economic slowdown, it would create a ripple effect, allowing the RBI more room to maneuver without fearing imported inflation. Domestically, he underscores the resilience of India's economy, with robust GDP growth projections for the fiscal year, driven by strong manufacturing and services sectors. However, he cautions that rural demand remains subdued due to erratic monsoons and agricultural challenges, which could necessitate supportive monetary measures to prevent a broader slowdown.

One of the key elements in Kulkarni's analysis is the RBI's inflation targeting framework. He believes the central bank will remain vigilant, ensuring that core inflation—excluding volatile food and fuel components—stays within the 4-6% target band. Recent data shows core inflation hovering around 5%, which is manageable but requires close monitoring. Kulkarni argues that the two anticipated rate cuts would be calibrated to address any nascent risks to growth, such as weakening export demand amid global trade tensions. He draws parallels with previous cycles, where the RBI has successfully navigated similar scenarios by front-loading rate adjustments during periods of economic uncertainty. This proactive stance, he suggests, could help sustain the momentum in capital expenditure and private investment, which have been bright spots in India's recovery post-pandemic.

Shifting focus to the equity markets, Kulkarni provides an optimistic yet balanced view. He anticipates that lower interest rates will act as a tailwind for stock valuations, particularly in interest-sensitive sectors like banking, real estate, and automobiles. With borrowing costs declining, companies in these areas could see improved profitability and higher consumer spending. For instance, the banking sector, which has been grappling with margin pressures due to rising deposit costs, stands to benefit from a more accommodative policy environment. Kulkarni recommends that investors maintain a diversified portfolio, favoring large-cap stocks for their stability while selectively picking mid-caps with strong fundamentals. He warns against overexposure to high-valuation segments, advising a focus on earnings growth over speculative bets.

In terms of sectoral preferences, Kulkarni is bullish on information technology (IT) and pharmaceuticals, citing their defensive qualities and export-oriented revenue streams. The IT sector, in particular, could gain from a weakening rupee if global demand picks up, while pharma companies benefit from steady domestic consumption and international generics markets. On the flip side, he expresses caution regarding commodities and metals, given the volatility in global prices driven by geopolitical tensions and supply chain disruptions. Energy sectors might face headwinds from fluctuating oil prices, but renewable energy plays could emerge as long-term winners amid India's push towards sustainability.

Kulkarni also touches on the broader macroeconomic implications of the RBI's potential pause after the cuts. He envisions a scenario where, once rates stabilize, the focus shifts to fiscal consolidation and structural reforms. The government's commitment to reducing the fiscal deficit, as outlined in recent budgets, complements the RBI's efforts, creating a virtuous cycle of growth and stability. However, he acknowledges risks such as geopolitical escalations, which could spike commodity prices and reignite inflation. In such cases, the RBI might need to reassess its stance, potentially delaying the pause or even reversing course if necessary.

For fixed-income investors, Kulkarni's insights suggest opportunities in government bonds and corporate debt, as yields are expected to compress with rate cuts. He advises locking in longer-duration instruments to capitalize on potential capital gains, while maintaining liquidity for any market corrections. In the currency domain, he foresees the rupee trading in a narrow band, supported by foreign inflows and RBI interventions, which could enhance India's appeal as an investment destination.

Overall, Kulkarni's prognosis underscores a narrative of measured easing by the RBI, aimed at nurturing sustainable growth without compromising on price stability. By forecasting two more rate cuts followed by a prolonged pause, he provides a roadmap for navigating the uncertainties ahead. Investors are encouraged to stay attuned to economic data releases, such as CPI figures and industrial production numbers, which will be pivotal in shaping the RBI's decisions. As India positions itself as a bright spot in a slowing global economy, this balanced approach could pave the way for resilient market performance in the medium term.

Expanding on the investment strategy, Kulkarni delves into the importance of valuation discipline. He notes that while the Nifty and Sensex have scaled new highs, pockets of overvaluation exist, particularly in small-cap segments where euphoria has driven prices beyond fundamentals. He advocates for a bottom-up stock-picking approach, prioritizing companies with robust balance sheets, consistent cash flows, and competitive moats. In the context of rate cuts, sectors like consumer durables and non-banking financial companies (NBFCs) could see renewed interest, as lower rates stimulate borrowing and spending.

Furthermore, Kulkarni addresses the role of foreign institutional investors (FIIs) in the Indian markets. He observes that FII inflows have been volatile, influenced by global risk sentiment, but a dovish RBI could attract more capital, especially if US yields decline. This influx would bolster market liquidity and support valuations. On the domestic front, mutual fund inflows remain strong, driven by retail participation, which provides a cushion against external shocks.

In conclusion, Naveen Kulkarni's analysis offers a nuanced view of the RBI's policy path, blending optimism with prudence. The prospect of two additional rate cuts before a pause signals a supportive environment for growth, but it also highlights the need for vigilance amid global headwinds. As markets digest these insights, the emphasis remains on adaptive strategies that align with evolving economic realities, ensuring long-term wealth creation for investors. This perspective not only informs tactical decisions but also reinforces the resilience of India's financial ecosystem in a complex world. (Word count: 1,028)

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