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Sees FY09 GDP growth at 7%: HSBC

2008-05-14 14:38:21 Source : Bazaar/CNBC-TV18
(Interview Transcript)

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Robert Prior Wandesforde of HSBC Holdings said the IIP numbers are likely to see a bounce back next month. He sees GDP growth at 7% for FY09. He said that the WPI may rise further from here on lagged effect of higher international crude and food prices. Prior added that inflation will increase further, as we see the overall effects of higher oil prices. He sees a rupee appreciation before the end of the year.

Excerpts from CNBC-TV18's exclusive interview with Robert Prior Wandesforde:

Q: What did you read into the IIP numbers? Did it look like it was just the base effect or do you think that the target should genuinely be scaled down for the next few months in terms of IP growth?

A: I think it partly is a base effect but the bigger message really is that the industrial sector has been slowing for most part of eighteen months. The peak rally was at the beginning of 2007 and it has been slowing since then and for very good reason.

This particular IIP number was exceptionally soft and I think we probably will see a bit of a bounce back next month but the trend is clear and the trend is down. I think we have got a further underlying weakness in growth yet to come. The forecast is still too optimistic.

Q: I can see some early brokerage reports talking about 6-7% growth for April. Is that what you estimate over the next few months?

A: Something of that nature maybe but I would put it a bit lower than 6-7%. To get a better idea of the underlying trend, let us take the three months average of the YoY rate just to smooth down some of this month-on-month volatility running at 5%, which is the weakest fall I think at least in five years now. It is a sector that is softening and will soften further as these lag policy effects continue to come through.

Q: What is it that you are penciling in, in terms of the FY09 or CY08 performance on GDP as well as the IIP numbers. Also a part of the theory that explains yesterday�s performance was really a high base effect. How much of that would you attribute it to?

A: I think the base effect was something, but the more important message is that there is an underlying trend, which has been down with. In terms of the GDP growth forecast we are still looking at a 7% growth for fiscal year 08-09. We have held that forecast since we began projecting FY08-09 about 12-18 months.

These interest rates tightening from the RBI would have a lagged effect in the context in the economy, which is very different to just a few years ago, particularly the leverage of economy. We look at the outstanding bank loans, as a proportion of GDP. India is a very different place now. It is much more sensitive to interest rates than it was previously. We have not seen the full effects of that. Industrial production will probably be in line with or slightly below the overall GDP growth rate.

Q: The Prime Minister�s panel is looking at taming inflation to about 5.5%. Do you think that is reasonable? What are you working with?

A: I do not think it is reasonable, unless we get some extraordinary collapse in the commodity prices. The current published inflation rate is at 7.6% but when we get the revised numbers in six weeks time it would probably be about 8.5%.

I think there is every danger that WPI inflation will actually rise further from here as we see the lagged effects of higher international crude oil and food, commodity prices feed through. We have not seen the full effects of that yet. The government will become increasingly desperate in its attempts to tackle this inflation problem. I do not see it coming down very sharply.

It would go higher in the short-term and remain certainly high. So unfortunately I think the government�s worst nightmare is going to be realized here. Growth is going to slide further and inflation may actually rise further and certainly would not come down anywhere near as sharply as they anticipate unless we get some sort of sudden reversal in commodity prices.

Q: There have been a couple of fiscal measures as well since we last spoke which was post the RBI meet, steel prices are being crunched down, crude of course does not pass through to the retail consumer and there are now checks on cement prices as well, purely by way of policy action. How do you read this kind of attempt to keep inflation lower or to hold it?

A: I think it is not going to be enough. These kind of measures may not be enough to hold what is a very powerful increase in some of these commodity prices and which through the subsidies have not seen full effects of it. But they will eventually come through. So it has some modest short-term dampening effects but it is probably only delaying further increases in those sectors.

Q: There has been an almost hairpin turn in the way the rupee has been moving suddenly. We are staring at 42.50 level to the dollar. Is this mostly because of what has been happening to the dollar globally? What kind of levels do you have penciled in for the rupee for the rest of this year?

A: Yes, I think it is partly a dollar phenomenon and I guess the currencies that have been most hit at the moment vis-�-vis the dollar are the current account deficits countries and those countries, that have a very high inflation. The rupee would soften but this weakness is more than they anticipate, their view is that the rupee may start to appreciate again before the end of this year and I think that is what should happen.

That is what the RBI should be pressing for at the moment. They should be allowing the currency to soften because it seems to me that a much more effective means of controlling inflation is through a stronger currency not a weaker currency and not by tightening monetary conditions through high interest rates or CRR rates. Since that will not have any impact on WPI inflation for at least two years. WPI inflation in two years time would be after the election and it could be completely different to the situation now. So the policy direction does not seem to be quite right to me at the moment.

But I think the RBI has made a lot of correct decisions in the past but I am not quite convinced about what is happening right now.

Q7: Give us one final word on the way crude has been moving and whether this 7% GDP target that you are working with, factors in the way crude has moved in the levels it is trading at?

A: That growth forecast was put together a long time ago when crude prices were lower. It is suggesting that the risks to that 7%, everything else unchanged, could actually be on the downside and I certainly would not rule out year average numbers that is lower than 7% this year. The risks around that number were perhaps looking skewed more on the upside but I think they are much more evenly skewed now and maybe tilting towards the downside at the moment.