Amidst fears that rising rates are leading to a slowdown of the Indian economy, Leif Eskesen, chief economist for India and the Association of Southeast Asian Nations (Asean), Hongkong and Shanghai Banking Corporation (HSBC), says more rate rises are inevitable, since inflation continues to stay stubbornly high. In an interview with Parnika Sokhi and Somasroy Chakraborty, Eskesen shares his outlook on fiscal and monetary policies in India. Edited excerpts:
Inflation continues to stay high, touching 9.4 per cent in June. Do you think it would come down to six per cent by March, as projected by the Reserve Bank of India (RBI)?
We expect wholesale price index-based inflation to stand at an average of 8.6 per cent this financial year. In June, inflation was slightly better than what we had anticipated. But the important thing is the underlying broad inflationary pressures are still in place. What we are seeing for the past several months is there has been a shift in inflation dynamics from the supply side to the demand side. That is why core inflation continues to remain high. We expect non-food manufacturing inflation to rise further. Also, monetary policy settings in India are still accommodative. Despite RBI raising rates, the real rates are still negative.
Do you expect the rates to rise further?
It is important for RBI to continue its policy of monetary tightening. We expect RBI will raise the rates again on July 26. While we think there is a good case for a 50-basis point rise, we believe, ultimately, RBI would increase rates by only 25 basis points. Inflation remains uncomfortably high. This suggests policy rates should be higher than they are now. Therefore, we expect a minimum rise of 75 basis points more in policy rates this financial year, which would take the repo rate to 8.25 per cent.
There is a fear that high rates have already slowed the growth of the Indian economy. What is your outlook on India’s gross domestic product (GDP) growth for this year?
We are in a situation in which moderation in growth is happening. But that is on expected lines, because RBI has been tightening rates through the course of the last financial year and in the early part of this financial year. Monetary policy impacts growth with a lag. What we are seeing now is the impact of earlier rate increases on growth. There is also the impact of elevated level of inflation on the economy. But growth is moderating and not collapsing. So, we are not too concerned on India's economic growth. We expect 7.6 per cent GDP growth for the Indian economy this financial year.
Which is a bigger threat to the Indian economy—external shocks or domestic inflation?
Right now, the key risk to India's economy is domestic inflation. India is a domestically-oriented economy and to some extent, it is humming to its own tune. These inflation pressures in the economy are homegrown and domestic regulators would have to address these. Most investors believe in India's medium and long-term growth story. To take advantage of the potential growth, it is important to fill the infrastructure gaps in the country, to improve education levels by increasing the enrollment rate, in line with peer countries. A lot is also tied down to the ease of doing business, which is quite low compared to other countries. Land reforms, less bureaucracy and a strong labour market are areas in which India needs to push further. Financial reforms, clearly in terms of the corporate bond market, are needed and opening the area to more private banks is also important.