See oil price hike post polls, may impact growth: JPM Chase

Rajeev Malik of JP Morgan Chase Bank believes the rupee may break 43 to a dollar in the near-term. He sees rupee strong in the medium-term and headwinds in the short-term.

He said the March IIP numbers were lower due to the base effect. He maintains his FY09 growth forecast of 7%. Monsoons are likely to be important and will help contain food inflation, he believes. But inflation is likely to remain above RBI's target range.

He sees an oil price hike post polls, which will impact growth going forward.

Excerpts from CNBC-TV18's exclusive interview with Rajeev Malik:

Q: Your take on this almost spectacular fall in the rupee and where you think it's heading?

A: We still have more distance to cover on that, 43 does not sound like an outlandish level at all and whatever move we have seen so far, RBI has not stepped in and given any indication about trying to stem it. I think there are broad forces at play here. One obviously is the higher global crude oil prices; every USD 10 increase in oil prices on a net basis adds on about USD 7 billion to the trade deficit or the current account deficit broadly speaking.

The second aspect is capital inflows as they were last year and the third aspect which increasingly becomes more relevant is inflation. But I think the most important aspect so far that we have seen on a fairly sizeable move on dollar rupee is that RBI hasn’t come in to stem that weakness and quite frankly I don’t think we will hear from them anytime soon. So getting closer to 43 perhaps even breaking above should not be ruled out in the near-term. 

Q: Do you think it’s a temporary phase or for the rest of this year should one actually start penciling in a much weaker rupee?

A: No, I do think this is going to be short-lived and when I say short-lived, it will stay with us for few months. Latter half of the year becomes an interesting story partly in terms of what extent the global risk aversion activity begins to improve and what picture emerges.

I think it’s important to bear in mind that rupee like the Indian equity market or like the Indian economy is a structurally strong story over the medium-term; it’s just facing some headwind in the near-term. If I were a policy maker, I wouldn’t necessarily lose sleep over this move because it should be an important lesson to everyone out there that currency or rupees just doesn’t always move in a straight line.

Q: Were you surprised by the March Index of Industrial Production (IIP) numbers and how does it set the stage for FY09 in terms of the overall GDP and industrial production forecast?

A: We were surprised to the extent that the number was weaker than our expectation. When you look through the details, I think there is much less to be concerned about for a simple reason and the base effect is playing a big havoc which will reverse in the coming months. I still think there are questionable things happening with the data and that needs to be sorted out. The bottomline being while the moderating trend is still in tact for the current fiscal year; the latest IIP numbers tend to exaggerate that kind of slowdown. Would the number prompt us to revise our already low 7% growth forecast? No. But I do think consensus numbers are still looking rich and subsequent couple of months should prompt more forecasts.

Q: What about the Reserve Bank of India? How do you expect them to read into these numbers in the upcoming credit policy that’s the July credit policy?

A: That’s still some time away. I think the biggest issue is going to be how the monsoon shapes up. A good monsoon will have favourable impact especially on food inflation, which is by far the most politically sensitive issue. The one thing that does genuinely concern me as I talk around with people, investors and others, nobody seems to be focusing on post-election approach. Essentially what’s happening is the government is refusing to pass on higher crude oil prices. But there is no free lunch and somebody has to pay the bill; it’s either the government or the consumer or the oil companies.

In the run up to the election obviously government wouldn’t want consumers to bear the heat, so it’s going to be either the oil companies or the government. The fiscal position certainly with the off-Budget items continues to become rather unsustainable and at the same time one cannot let oil companies go bankrupt.

So sooner or later the government will have to come in and put a higher bill, but interestingly enough post-election irrespective of the government that comes in whether current or new, whatever the political leaning, the first thing that’s going to get done is a hike in prices. Tactically it tends to be the easiest thing to do; you have a fresh mandate, come in put the blame on the previous government or say things are unsustainable and we have no choice but to do it. And with the election out of the way voters are unlikely to vote with their seat and that is something which all the several months away is going to have a fairly significant impact on subsequent years growth performance as well.

But maybe it’s a bit early in the day; nobody talking about it. Essentially we are trying to live with higher growth numbers without having passed on a lot of these things but sooner or later our actions are going to catch-up with us.

Q: Where does all that leave inflation concerns? There have been a couple of fiscal measures as well and a collated report by JP Morgan on how high inflation is across EMs and developing countries. Is it facile to believe that we are going to get a major scale down in inflation?

A: I don’t think we’ll see a major scale down in inflation and as you have rightly mentioned the rest of the emerging markets are definitely dealing with it and there are variety of different options Central Banks have adopted. Interestingly enough, very few of them are necessarily adopting the way of currency appreciation.

I think India could be in a slightly better position in the near-term simply because of the monsoon outcome. It is somewhat bizarre that there is so much risk on a single monsoon, but I think that in itself could be an important driver. So inflation concerns will persist, over the next 2-3 months we should begin to see better numbers but inflation would still remain in above the RBI’s target range.

The question here is - how aggressive should the RBI’s response function be? By whatever the RBI has done so far, it’s giving two important signals; first the rupee appreciation tool and second it hasn’t touched policy interest rates in over a year. Once again I think it’s going to continue with that.

So at best the momentum is going to be really in terms of trying to use CRR because ‘when push comes to shove, it gets the job done’.

Q: I know you don’t track the equity market in great detail, but your sense of where things are headed? In the past this kind of a high inflation environment has not been conducive to financial assets, added to that we have almost got a new price zone from many of these commodities, is this generally going to be a tough year of the financial assets you think?

A: It should be one of the interesting things. A lot of people that I talk to generally say that it somewhat surprising that Sensex is not lower compared to where it is currently. The big debate is what is the magnitude of that slowdown. I think the one saving grace if I can put it that way has been on the earnings front so far, but I still think that over the next 2-3 quarters, it’s highly unlikely that more pressure on earnings does not necessarily manifest itself. Topline growth is slowing down, margin pressure are increasing, the growth momentum is moderating the kind of hype that justify the fairly alleviated or P/E expansion is just not there.

So the medium-term story still looks very intact, but in the near-term there are headwinds that have to be digested not to mention that as you get in the second half of this year, people will begin to look at next year and the issue then is going to be what the post election setting would look like. Few are necessarily focusing on it, one of the first actions of the new government is going to be to offer some bad news to everyone, in terms of price hikes.