The India growth story should not be written off, but as of now, even for the optimists, it looks like it will take a while to see the light of day. Atsi Sheth of Moody's, Sajjid Chinoy of JPMorgan and Ficci president and country head of HSBC Naina Lal Kidwai discuss the state of the economy, the macros and the RBI policy on CNBC-TV18.
While Sajjid Chinoy of JPMorgan feels it is hard to see India’s growth accelerate above 6 percent as fiscal consolidation, which impinges on growth, is going to be the focus this year. In addition to that, a wobbly global economy is not a great backdrop for the export market. The depth of the growth downturn has been unanticipated and was not expected to dip to 5 percent, says Atsi Sheth of Moody's. It is unlikely that there will be a jump in growth from 5 percent to 7 percent in a few quarters.
Looking at the positives, Naina Lal Kidwai says the repo rate being cut by the RBI by 25 basis points on Friday comes as a breather, and this should now translate to lower lending rates for the industry.
Below is the verbatim transcript of the discussion
Q: Let me get your reaction to Reserve Bank’s (RBIs) policy decision, ratings agency Moody's has today said that the RBI rate cut was along expected lines. Speaking about the Indian economy, Moody's has also added that though, India's inflation and current account deficit (CAD) are still high, it does see India's rating outlook as stable. They have added a word of caution, the Moody’s is saying that it expects India’s growth downturn to extend. So on the back of what we have heard from the Reserve Bank governor today, are we past that downgrade threat where we currently stand with the economy. What measures the government has taken. Do you believe on that basis we are past the downgrade threat for now?
Seth: The depth of the growth downturn has been unanticipated. People didn’t expect growth to go as low as 5 percent and also how this downturn extended and I think that is what perhaps took people by surprise. What we are seeing now is that again the bottom has been reached in terms of growth. There have been some policies to assuage the effect of the global financial crisis etc. But in general the recovery in growth will be slow and it will be extended. Policy action that have been taken in the last six months help, but they can’t really turn on a light in terms of growth. Growth recovery will still be slow.
Q: Where do you then see growth for FY14 because we have got disconnect between what the RBI is projecting at 5.7 percent, the government is projecting anywhere between 6.2-6.7 percent. Where does Moody’s view growth for Indian?
Sheth: Our growth forecast for FY14 is about 5.9 percent. It is just a little below 6 percent. Again, this is because of our base case forecast that this recovery is going to be slow. You are not going to snap from 5 percent to 7 percent very soon in a few quarters.
Q: Would you belong to the camp that is saying just under 6 percent or just about 6 percent or do you believe that government when it says that the RBI is being too pessimistic about growth?
Chinoy: It is hard to see growth accelerate above 6 percent. Let’s understand the drivers. It is going to be another year with fiscal consolidation which is great for a sentiment, good for medium term prospects. But in the near term, fiscal consolidation impinges on growth. By all accounts, the global economy is still wobbly so we will not get too much on export growth. We know that the investment constraints continue to bind. So it is hard to see where this big acceleration in growth is going to be. In the past, the RBI has had to scale down their growth forecast a couple of times last year so I am not surprised that they have been a tad conservative. Our own forecast is in the 5.8-6 percent range. So I think we have to accept that it is going to be a slow and halting recovery later in the year. Until some of these structural issues are resolved, we run the risk of reflating the economy too soon.
Q: The street's hopes for a CRR cut have been dashed. The governor seems to suggest that banks have enough liquidity but the bankers say that they can’t do anything because liquidity continues to be tight.
Kidwai: Currently, the CRR rate is certainly an indication of the liquidity. There was a request from the banking sector to bring down the CRR rates. The RBI maintaining the CRR is a sign of assurance from the RBI governor that he keeping an eye on liquidity and take suitable measures as and when required. So I think we have to now rely on him for that. The truth is that liquidity is not at alarming levels, but liquidity is tight and therefore it is important to make sure that we have enough liquidity in the system. The good news is that the repo rate did come down 25 bps and now we have to translate this to more effective lower lending rates for industry to make use of the benefits.
Q: What do you make of the RBI's commentary on very little room for further monetary easing? The government is of the opinion that it created enough elbow-room and the macroeconomic fundamentals have improved to give the RBI room to be a little more aggressive. But when the RBI governor says there is very little room for further easing, do you expect another 25 basis point (bps) rate cut or perhaps nothing at all?
Chinoy: I think the RBI made it clear that given the current landscape of macro-financial risk, any monetary response will have to be very cautious. So, it has said very clearly that its short-term objective - those words have been used explicitly- is to see inflation headline wholesale price index (WPI) inflation at 5 percent.
Now if that’s their objective, most estimates have set inflation well above that for the rest of the year and it would make it very difficult for the RBI to go on a larger easing cycle. I think that one more rate-cut of 25 bps is most likely at the review in July when it will be more clear if the progress of the monsoon is normal and at that point they will probably signal the end of the easing cycle.
So, I am in the camp that the RBI’s guidance will be more hawkish barring a big fall in commodities. That’s the only scenario in which I think the RBI can cut rates. Barring the fall in commodities, I think there will be only one more 25-bps.
Q: A 25-bps cut on the repo, the banking community says, is not enough for any real transmission to the economy. Do they anticipate being able to cut rates any time soon?
Kidwai: A lot is going to depend on the deposit structure of banks because deposit-rates are falling and that becomes a challenge for banks to bring lending rates down and make sure that the high savings rate of Indian households flow into productive investments like mutual funds and insurance.