RBI inflation target to be met by Mar '09: JPM Chase Bk

Q: The March IIP growth was weaker than expected, inflation remains elevated sizeable revision in the provisional estimates add to the concerns. Is it all gloomed or do you see any hope?

 A: As it typically happens with evolving macroeconomic trends, it is always pluses and minuses. Moderation in growth is very much there, the reason is spate of IIP numbers which tend to exaggerate the magnitude of that moderation. A trillion-dollar economy like India still has a serious data-related issuance in what is getting captured. Inflation remains the most topical concern certainly in political circles as well. Post-monsoon, we will begin to see headline over year ago; inflation numbers coming off probably looking better towards the end of this year.

Obviously the big question right now is firstly how the fiscal dynamics, which are totally on an unsustainable past gets sorted out and whether or not there is going to be a hike in local fuel prices. On the latter, it’s suspected that at the end of the day, a compromise with some rationalization as far as the duty structure is concerned will be seen and a small hike possibly only in petrol and diesel pretty much getting left off the hook. In any case, cooking gas and LPG and kerosene have not been touched for donkey years. One of the interesting unfolding dynamics are really on the rupee. 

Q: Is it a sharp sudden correction that we have seen in the rupee?

A: It is still very much work in progress. It is a correction that has more to run, dollar-rupee at 45 (to a dollar) by the end of this year should not be a big surprise, given what is happening to the oil prices globally and to capital inflows into India. Both of them are combination; that would suggest further weakness for the rupee. What we haven’t seen and that could be an interesting set of dynamics is really change in hedging behaviour which can actually push the dollar-rupee to weaken even more.

People often times talk about Reserve Bank of India (RBI) having a sizeable amount of foreign exchange reserves that can intervene and prevent that slide. We did see it coming in at Rs 43.20 to a dollar and it will come back in. But, it is not necessarily going to fight or reverse the underlying trend, which is really coming from unfolding balance of payments dynamics. It is just in process that has to run its course.

Q: You mentioned crude and there has been concern of course on what happens to the oil-marketing companies, also the bonds for the fertilisers. In these past few weeks, the real concerns seems to have become what is happened with the fiscal, the kind of deficit we are running. Now you have one of the more cautious targets in terms of a 7% GDP growth. How worried are you by all these events and do you think that figure might have to be tweaked or re-looked at again?

A: The 7% is this year’s growth. We are still quite all right; consensus though still has work to do and cut the numbers lower. The critical dynamics are really going to be for the next year’s outlook. We along with a lot of other market forecasters have penciled in a bit of a pick up into next year.

One of the concerns is depending on the time of the election, with the new government coming in and deciding to put pressure on the fiscal and force to hike some prices etc. That kind of rebound that markets are building in for next year may not necessarily pan out. So, what you could have is 7-7.5% range growth for this year and next.

Q: The other part of this entire puzzle of course is what has been happening in the global arena. The next Fed meeting is a bit far out but what are you penciling in by way of action because now it is becoming more split between no move to slim chance of a 25-bps decrease a standstill. What do you think they will do?

A: For all practical purposes, the Fed is moved aggressively enough and part of that was the decision to do more earlier rather than doing it gradually over a longer period of time. So they are going to be pretty much on hold.

The broader issue is really the underlying real economy improving. On that overall message still seems to be somewhat mixed. For all practical purposes India would have much more to deal with unfolding local dynamics and here is a great story, which still remains a pretty convincing medium-term story. But, the sheen or the shine has certainly come off. To that extent, that hype is getting deflated.

Q: Clearly given the strength of the BJP’s victory in Karnataka, does it put one argument to rest that mid-term polls are very unlikely. We see elections only when they are almost due in 2009.  Is that good news, bad news?