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India is going through a challenging macro-economic environment as it heads into election year in 2014. On its part, the Reserve Bank of India (RBI) has been fine-tuning its policies to prop-up growth and curb inflation. Shilpa Kumar, senior general manager and head – markets group and proprietary trading group, ICICI Bank tells Puneet Wadhwa in an interview that though the Government remains committed to its fiscal targets, it might necessitate some reduction in expenditure that could weigh on growth in subsequent quarters. In the absence of significant policy triggers, deposit and lending rates are likely to be a function of systemic liquidity, she adds. Edited excerpts:
Do you think that the Reserve Bank of India (RBI) now wants to be deliberately behind the curve as regards fine-tuning its policy stance given the outcome of the recent FOMC (Federal Open market Committee) meet?
Recent growth data from the US has been very positive and the third quarter number came in at a more than expected 4.1% quarter-on-quarter (q-o-q) annualised. This robust US growth will also support the global economic recovery. Against this backdrop, the US Federal Reserve initiated the inevitable tapering of the QE (quantitative easing) programme. Given that this had been the key market focus since May this year, the actual event came as a relief as it removes uncertainty from the markets.
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How do you see inflationary trends panning out as we head into 2014? How close are your estimates / calculations to RBI's projections?
On the WPI (wholesale price index) front, our March-end estimates are around the 7% mark, assuming a decline in food inflation pressures. We expect CPI (consumer price index) to trend downward to around 9% year-on-year (y-o-y) by March 2014. Broadly, the direction of our trajectories is in-line with what the RBI has projected. The crucial question is RBI’s choice of a nominal policy anchor based on the recommendations of the Monetary Policy Framework Committee as future rate actions will be contingent on the same.
Do you think 2014 will be better in terms of overall growth for the Indian economy as compared to 2013?
We believe the second half of the year is expected to witness better growth performance than the first. We maintain our FY2014 growth projection at 4.8% y-o-y. The growth in this fiscal will primarily be supported by agriculture and external sector. The risk to the view arises from the fact that Government spending will remain muted in the rest of the fiscal if deficit targets are to be met.
What about the rupee and bond yields? Could they play spoilsport?
Bond yields are primarily going to be a function of the demand-supply scenario and inflation trajectory going ahead. Markets will keenly watch inflation prints in the coming months as this will be a key input in future monetary policy decision making, thereby influencing bond prices. The rupee, on the other hand, will be supported by an improvement in current account deficit and therefore reduced vulnerability on external account. Formation of a stable reform oriented government is essential next year as this will expedite the reform process and support growth and therefore the currency.
On the external front, gradual QE tapering by the Fed combined with the expectation of a dovish stance by the incoming US Fed chairman Janet Yellen will have a limited market impact. On balance, we expect the Rupee to trade with lower bound of 60 in FY2014.
How much of an additional fiscal burden have you factored in your estimates given that we are headed into an election year and the government could announce sops / populist measures? Can the current account (CAD) and the fiscal situation spin out of control?
We believe that the Government remains committed to its fiscal targets and that they will be met despite it being an election year. This might necessitate some reduction in Government expenditure in the rest of the fiscal as receipts are likely to be below budgeted levels. This is expected to weigh on growth in subsequent quarters.
The sharp improvement in current account deficit this year from 4.9% of GDP in FY2013 to an estimated 2.9% is encouraging. In the short term, it may be necessary to retain the curbs on gold imports till the recovery in exports sector is confirmed. Going ahead, policymakers should use this opportunity to institute structural reforms in order to bring about a sustainable improvement in the CAD.
The RBI adopted liquidity enhancing measures recently like concessional swap window for FCNR (B) deposits besides increasing the interest rate ceiling cap on such deposits. Do you think such interim measures could become more frequent over the next couple of quarters? How do you see the overall liquidity situation panning out?
Elevated CAD levels raised concerns about its financing. This was further aggravated by the sharp debt related FII outflows earlier this year that brought to the fore our external vulnerabilities. In future, the policy emphasis should be to achieve a sustained decrease in current account deficit and also to reduce dependence on volatile portfolio flows for its financing. Instead the focus should be on attracting more stable sources of capital, which will not destabilise the Rupee in the event of adverse market triggers.
Banking system liquidity has improved sharply owing to the significant flow of NRI (non-resident Indian) deposits and bank borrowing related swap flows. While, government spending cuts in order to meet fiscal targets will worsen liquidity deficit, we expect it to remain near 1.5% of NDTL (net demand time liabilities) for the most part of fourth quarter. This is a sharp improvement as compared to the same period last year.
Do you think that the credit off-take could moderate going ahead? What is the road ahead for deposit and lending rates?
Credit growth peaked at ~18% in early September as a consequence of RBI’s strong interest rate defence of the currency, which led to the systemic operative rate moving from 7.25% to 10.25%. On account of this, CP (commercial paper) issuances were to a large extent replaced by relatively cheaper bank credit. Further, credit growth was also supported by the sharp depreciation in the currency which led to increased demand for credit from importers. Recent trends show that credit growth is easing and it is expected to continue at its current pace for the rest of the fiscal.
The surge in FCNR deposits has pushed aggregate deposit growth to 16% y-o-y. This exceptional flow of funds has resulted in current deposit growth rate exceeding credit growth. In the absence of significant policy triggers, deposit and lending rates are likely to be a function of systemic liquidity.
Normally, we see compression in liquidity towards the end of the fiscal and hence would expect a slight upward bias in bulk deposit rates at that time, even though retail deposit and base rates are likely to remain broadly stable.
