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High inflation, oil can push RBI to cut rates: Rahul Chadha
March, 27th 2012

Market sentiment has taken a beating following new provisions to the General Anti-Avoidance Rules (GAAR) rules. Even though finance minister Pranab Mukherjee assured India Inc that Income Tax officials would not have powers to arrest industrialists or company officials, apprehensions still linger.

GAAR is a part of the Direct Tax Code (DTC) which was proposed in the Budget. The rule is aimed at complicated deals where one of the purposes is to avoid tax.

In an interview to CNBC-TV18, Rahul Chadha, head of India investment/associate director, Mirae Asset Global Investments says he has seen fairly large investors coming through their own registered accounts on P-Notes (participatory notes) but that a fair bit of these accounts are registered through Mauritius. "So the whole ambiguity is on what you call as a business existence in Mauritius, and how you define the status of those companies." He says clarity will come in only in the next few weeks.

For now, FIIs remain hopeful that once clarity comes in, foreign investment both from portfolios and direct investment which has been welcomed in the past continues to get the same encouragement as before.

In the near-term, he sees the market remaining subdued. Many analysts and investors are banking on the Reserve Bank dishing out a rate cut on April 17 but for the market to perform, successive rate cuts are needed over the next 12-15 months. The RBI has a limited window to work in with macro issues like spiraling crude prices, core inflation remaining elevated, coalition politics leaving the government's policy decisions and a poor fiscal deficit.
Below is the edited transcript of the interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video

Q: Yesterday the market sentiment was quite bad because of all this confusion over GAAR, how bad is the situation, how confused are people, what are the real issues according to you?

A: The point is much more than P-Notes, we have seen fairly large investors coming through their own registered accounts but fair bit of these accounts are registered through Mauritius. So the whole ambiguity is on what you call as a business existence in Mauritius and how do you define the status of those companies. I think clarity is sought on that so let us wait for that in coming weeks.

Q: Yesterday there were reports that perhaps Finance Ministry officials will be holding conference calls with the FIIs to explain some of this, have you sought any clarification from them or have they reached out to institutional investors like you?

A: We have talked to a number of people but there isn't much clarity on this. You hope that in coming weeks you get clarity on that and you also hope that foreign investment both from portfolios and direct investment which has been welcomed in the past continues to get the same encouragement as before.

Q: Do you expect markets to remain subdued like they have been for the last few weeks out here because we have corrected nearly 400 points from the recent top now?

A: I think near-term markets would remain subdued. Budget has been in sync with expectations. One expected some rollback of excise duty cuts which were given two years back so that has happened. What has got markets worried was the rollback of fare hikes which came in Railway Budget, absence of hike in retail fuel prices. The fiscal deficit number of 5.1 % given in the Budget for next year looks a bit aggressive, it could be anywhere between 5.5% and 5.8% and the government borrowing program seems large. So you need to see definitive steps to reduce the deficit because year after year it is becoming a big number and that is what is keeping markets worried.

Q: We will hear details of the borrowing programme today but there is a debate now on market about whether we will get that rate cut in April policy or not, do you think we will?

A: I think it is inflation - where the core inflation number is coming, which also indicates the central banks comfort with cutting rates. It is widely expected that we will have one rate cut in April. But for the markets to perform, you need successive rate cuts over next 12-15 months, which looks difficult at this point of time with where the crude is, where all the tax increases are being passed by the business to the consumer. Inflation may remain slightly high, which may impede central banks ability to cut rates.

We may get a limited window where inflation is soft for next 3-4months but after that it comes back again and that may impact market. In terms of policy paralysis, we are yet to see government take tough decisions. Some of it happened but because of coalition politics and all these constraints from the more conservative partners, we are seeing government unable to take tough decisions. So that coupled with poor health of the fiscal is weighing on markets.

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