The dynamics in the Indian economic scenario are unfolding. Inflation, as well as growth numbers, look to ease out. With interest rates on the rise, there are several questions that arise on the outlook for overall growth. Rahul Bajoria, regional economist, Asia Pacific, at Barclays Capital, shared his views with Akash Joshi. Edited excerpts:
What in your view, has changed in India over the past few months?
After the food inflation shocks, there have been certain changes. The demand growth spill-over and the rising inflation prompted the Reserve Bank of India (RBI) to start the rate normalisation cycle. Over the last three or four months, there has been monetary tightening and the dynamics are changing. However, over the next six months we may see inflation tapering off, especially on the food inflation side. This will be prompted by good monsoons and increased supply of food grains. There has been a significant jump in the sowing. Now, supply bottlenecks are bound to ease, and weaker global commodity prices also point that non-food inflation would also be range bound with a downward bias.
When you put this in the perspective of the monetary policy outlook, the need for RBI to remain ‘hawkish’, as it was in the July review of the monetary policy, is dissipating fast. Six months down the line, if inflation would come down to around six percent, we think RBI may pause and rethink the normalisation beyond the September policy review. Growth conditions would remain stable. However, growth rates would be slightly weaker. Moreover as we see it, there is a balancing of risk that has been happening. Inflation is coming down and the growth rate is moderating.
There are views that corporate earnings were not exactly in line with expectations, and things would remain tight here. What is your take?
Overall, if you look at the revenue growth, it has been strong. However, going ahead, there would be a chance that earnings would come down. However, it is not something to be worried about. These would be largely supply side issues and the demand would remain strong. Corporate spending and investments are likely to spur up.
We have seen a hardening of interest rates. What do you expect now?
Rates were bound to go up and RBI also expected them to tighten. I don’t think anybody disputes that the rates in the medium term would harden. But I think, given the environment, people are willing to pay a bit more as credit demand picks up. Moreover, if domestic rate situation hardens, then they can borrow overseas and there has been increase in short-term overseas borrowing, thanks to the yield differential. International rates are not going to rise soon. I am not bothered on this front.
The purchasing managers’ index (PMI) has been easing in the past few months, both for India and China. Is there a cause for concern?
The moderation is not a surprise. PMI for both India and China was at high levels and it came on due to the almost V-shaped recovery. This correction is a healthy one. China’s recovery started earlier and the correction is policy driven and they have the flexibility to change this. US PMI has not moderated as such. The impact of this moderation would be on export demand, thanks to China. But for India, investments and private consumptions are bigger drivers of growth. The impact could be on the financial market side, which is more driven by sentiments and risks, and we do see some moderation. India has received around 50 per cent of the inflows into Asia, so there is a strong probability that the pace of inflows could slow down.
Would you then see an impact of this on financials, especially capital markets?
There would not be a pull-back as such, only that people would be less positive than earlier. There is some room for correction and the growth could stall a bit. But then this is a part of a cleansing process. Asset valuations would need to have a correction. However, chances are that the equity markets would probably still be higher on an annual basis, but the pace would be lower.
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How do you see the rupee movement taking place in the days ahead?
The rupee has underperformed against the dollar over the past three months. It was impacted by some valuation norms and a slowdown in inflows. The current account deficit ballooned and might even grow more. But then there will be a pick-up in capital account. The composition will be skewed towards debt, especially short-term debt. From that perspective, we could see a situation where foreign exchange reserves would rise and the rupee would remain weak. Our six months view on the rupee to dollar value is 47.5 and we expect it to head back to 46.5. Overall, the currency would remain range bound and underperform, as compared to its Asian peers.
What are your views on the much talked about fiscal fragileness in India?
We remain comfortable on India and the 3G auctions did improve investor sentiment. And, at the same time there is a supplementary demand for spending. We do not see government borrowings reducing. However, investors have become comfortable with high growth domestic product (GDP) and revenue intake and the public debt/GDP is expected to be lower, and this would in turn, lower borrowing cost.
People are more hopeful and the need to support growth through non-planning is reduced. Private investment is seen to be on the rise.
What could be some areas to watch out for, as things unfold in the Indian economy?
The recent decline in money growth is something to watch out for. We expect credit growth to pick up and though the numbers would not indicate it, there is a strong momentum. RBI needs to target inflation and that is the top priority. But if the ‘balance to tight’ liquidity scenario remains tight beyond six months, there could be a spill over in growth. But then, RBI is committed to have sufficient liquidity and they have policy levers to improve these.
Also, another factor to watch out for are fund flows. RBI flagged off that there is significant risk on the both sides of the capital flows. We do not believe that there could be a double dip. We do not see a pull out but RBI has mentioned it as a risk nevertheless. The situation is balanced at the moment, and would only get upset if there is a significant change in the risk aversion. But this is an extreme case. In India and China, the growth differentials, when compared to others, are large enough to attract flows.