Expects significant upside risk to inflation in FY15 on account of the expectation of below normal monsoon
Care Ratings in its outlook of FY2014 has expected that the economy in general will improve, albeit gradually on the premise that a strong government would be in place after the Elections, which will reduce uncertainty in business environment and focus on reviving growth. Care Ratings believes there would also be less global uncertainty with respect to tapering of quantitative easing measures in the developed world.However, with the IMD bringing out its recent forecast for the South West monsoon being 95% of the long period average, Care Ratings is somewhat cautious on the performance of the farm sector. Overall, Care Ratings projects a GDP growth of 5.2-5.5% for FY15.
As per the Care Ratings, significant upside risk to inflation in FY15 has emerged on account of the expectation of below normal monsoon. CARE projects for FY15 an average WPI inflation of 5.5% and CPI of 7.5%.
Government has aggressively met the fiscal deficit targets in the past, so Care Ratings hopes new Government to follow the same route. However, the target for FY15 does appear to be steep at 4.1% of GDP given that there will be a new office in charge facing the major goal of pushing up growth. Thus, Care Ratings expects a revision in the fiscal deficit target in the announcement of the final budget for FY15.
If the monsoon is normal and inflation under control, Care Ratings expects RBI to reduce rates by 50 bps in Q4 of FY15. However, Care Ratings cautions that any agri shock, which gets reflected in higher food inflation, will keep interest rates at the present level, and any untoward overshooting of inflation (which is the extreme case) could warrant a further increase in rates. Thus, Care Ratings expects G-Sec yield for 10-years would range between 8.8-9% guided more by the term repo rate but can settle lower in 8.6-8.8% range if RBI lowers rates towards the end of the year.
Care Ratings projects exports to grow by 8-9 % and imports by 11-12% in FY15. The CAD in FY15 is projected to be in the range of 2.5-3% of GDP
As per Care Ratings, the RBI will play a key role in determining the direction of movement of the rupee. With an announcement to sell bonds under the MSS, there is expectation that the rupee will be held back from appreciating too sharply. Capital flows will largely drive the exchange rate. Care Ratings expects Rupee to be stable in the range of Rs 60-62 per dollar in FY15.
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