In a bid to support staggering currency and revamp growth, Indian government announced slew of measures to attract foreign investments. Madan Sabnavis, chief economist, CARE Ratings tells Aastha Agnihotri that the recent moves will take time to materialize and its impact will be seen over a year or two.
India's growth concerns aggravated after a steep contraction in June's IIP data coupled with rise in both CPI and WPI inflation. What kind of trend do you expect in terms of recovery?
Growth in fiscal 2014 would tend to be muted and marginal, aided considerably by a low base effect. We have seen quite a few announcements made by the Government in the context of reviving growth, but these measures have to get translated into action for any impact to show on growth numbers. In the first two months it is clear that there has been virtually no movement in industry and the two sectors that would be the starting points, i.e. capital and consumer durable goods are in the negative growth rate territory. With the festival season being a few months away we cannot expect consumer demand to pick up and hence we could expect a similar picture till that point of time. It is expected that the good rains and resulting harvest along with the seasonal trend of consumer spending in the festival season will provide some fillip to growth.
Also there is still expectation that the infra projects that have gotten stalled for various reasons would be in motion soon, which will aid the gradual upward shift in the growth curve. Further there are expectations of a rate cut, which may be deferred against the backdrop of developments in the currency market and the measures taken by RBI recently to check liquidity and hence the exchange rate. There is hence a lot of uncertainty in the market and hence any recovery will be gradual and marginal.
The Reserve Bank of India's recent move to hike short-term rates did little to save rupee but slaughtered growth prospects further. Where do you see currency by the end of the year and have you revised your GDP target for the fiscal 2014?
I do not think that the RBI move has come in the way of growth prospects in a very significant manner even though it is tempting to come to such a conclusion. What the RBI has done is to tighten liquidity which will result in higher interest rates at the lower tenure spectrum. Long term interest rates will be guided, to my mind, more by what the RBI does to the repo rate. While base rates will increase for banks which are more dependent on short term funds, overall lending rates may not rise yet. Besides, we should remember that interest rate is just one factor that affects growth. Demand is the main problem that we have today. Consumers are not spending because of high inflation, government is not spending because of high fiscal deficit and investment is down because rates are high and there is still spare capacity. This entire cycle has to be reversed and interest rate is not a magic wand in the hands of the RBI.
We have lowered GDP growth prospects to 5.8% but that is not because of the RBI action but based on the underlying factors in the economy today. The rupee should range between 58-60 against US dollar based on fundamentals but there will be variations around this range depending on sentiment. We have seen that the variation is between 50-70 paise in both directions on account of the effect of any news.
Does the recent macro-economic data dampen any hope of a rate cut by the Reserve Bank of India in the medium-term?
The RBI would have gone slow on rate cuts for two reasons. First, the forex situation does put pressure on loosening rates today given the dependence on FII flow though assuredly given the rupee volatility, there may still not be inflows into the economy. Second, inflation though seemingly under control has shown an upward tendency by both the CPI and WPI for June. Though not significant, it does not take into account the impact of depreciation in core inflation as a lot of imported inflation will be translated through this factor. Therefore, a rate cut would not have been considered by the RBI in the forthcoming policy even in case the recent measures were not invoked. I should think that once stability comes in the forex market and a clear picture on inflation emerges, RBI will not be averse to a rate cut, which will be probably in the second half of the year.
Going forward, do you believe the recent reforms to be a key catalyst in India's out-performance in the Emerging Markets basket?
There are two points on reforms. First, they should be seen as a part of the overall approach to growth that the government has undertaken in steps and would bear results over a period of time. Merely relaxing FDI limits will not mean FDI coming in a big way today. The impact will be seen over a year or two. Second, reforms are only an enabler for growth and create an environment conducive for doing business. Growth has to come from within and here, I would like to reiterate that the clue is in demand, and all segments have to contribute to it (exports may not be able to do so even with the rupee depreciating as global prospects are weak).
India's growth concerns aggravated after a steep contraction in June's IIP data coupled with rise in both CPI and WPI inflation. What kind of trend do you expect in terms of recovery?
Growth in fiscal 2014 would tend to be muted and marginal, aided considerably by a low base effect. We have seen quite a few announcements made by the Government in the context of reviving growth, but these measures have to get translated into action for any impact to show on growth numbers. In the first two months it is clear that there has been virtually no movement in industry and the two sectors that would be the starting points, i.e. capital and consumer durable goods are in the negative growth rate territory. With the festival season being a few months away we cannot expect consumer demand to pick up and hence we could expect a similar picture till that point of time. It is expected that the good rains and resulting harvest along with the seasonal trend of consumer spending in the festival season will provide some fillip to growth.
Also there is still expectation that the infra projects that have gotten stalled for various reasons would be in motion soon, which will aid the gradual upward shift in the growth curve. Further there are expectations of a rate cut, which may be deferred against the backdrop of developments in the currency market and the measures taken by RBI recently to check liquidity and hence the exchange rate. There is hence a lot of uncertainty in the market and hence any recovery will be gradual and marginal.
The Reserve Bank of India's recent move to hike short-term rates did little to save rupee but slaughtered growth prospects further. Where do you see currency by the end of the year and have you revised your GDP target for the fiscal 2014?
I do not think that the RBI move has come in the way of growth prospects in a very significant manner even though it is tempting to come to such a conclusion. What the RBI has done is to tighten liquidity which will result in higher interest rates at the lower tenure spectrum. Long term interest rates will be guided, to my mind, more by what the RBI does to the repo rate. While base rates will increase for banks which are more dependent on short term funds, overall lending rates may not rise yet. Besides, we should remember that interest rate is just one factor that affects growth. Demand is the main problem that we have today. Consumers are not spending because of high inflation, government is not spending because of high fiscal deficit and investment is down because rates are high and there is still spare capacity. This entire cycle has to be reversed and interest rate is not a magic wand in the hands of the RBI.
We have lowered GDP growth prospects to 5.8% but that is not because of the RBI action but based on the underlying factors in the economy today. The rupee should range between 58-60 against US dollar based on fundamentals but there will be variations around this range depending on sentiment. We have seen that the variation is between 50-70 paise in both directions on account of the effect of any news.
Does the recent macro-economic data dampen any hope of a rate cut by the Reserve Bank of India in the medium-term?
The RBI would have gone slow on rate cuts for two reasons. First, the forex situation does put pressure on loosening rates today given the dependence on FII flow though assuredly given the rupee volatility, there may still not be inflows into the economy. Second, inflation though seemingly under control has shown an upward tendency by both the CPI and WPI for June. Though not significant, it does not take into account the impact of depreciation in core inflation as a lot of imported inflation will be translated through this factor. Therefore, a rate cut would not have been considered by the RBI in the forthcoming policy even in case the recent measures were not invoked. I should think that once stability comes in the forex market and a clear picture on inflation emerges, RBI will not be averse to a rate cut, which will be probably in the second half of the year.
Going forward, do you believe the recent reforms to be a key catalyst in India's out-performance in the Emerging Markets basket?
There are two points on reforms. First, they should be seen as a part of the overall approach to growth that the government has undertaken in steps and would bear results over a period of time. Merely relaxing FDI limits will not mean FDI coming in a big way today. The impact will be seen over a year or two. Second, reforms are only an enabler for growth and create an environment conducive for doing business. Growth has to come from within and here, I would like to reiterate that the clue is in demand, and all segments have to contribute to it (exports may not be able to do so even with the rupee depreciating as global prospects are weak).
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