Brinda Jagirdar, GM & head economic research, State Bank of India, says that the current economic scenario still shows lot of macro weakness and the situation does not look very positive. She feels that IIP numbers which is expected on Tuesday may either come out flat or negative.
Crude imports are highly income inelastic. If crude continues to remain at current elevated levels, then certainly it would have a negative impact on CAD and will also hurt the rupee.
Below is the edited transcript of her interview to CNBC-TV18.
Q: What do you expect from IIP numbers which will come out tomorrow and how influential will it be on the Reserve Bank’s rate setting in March?
A: There is lot of macro weakness and the situation does not look very positive. Tomorrow's numbers could be either flat or tad negative. All policy makers feel that December IIP number could even be slight negative. Secondly, WPI which softened to 7.18 percent in December, could trend around 7-7.1 percent levels for January.
We don't expect any cheering news from trade data. I was expecting GDP number above 5 percent. Once the final number is out, then we could see an upward revision to about 5.4-5.5 percent.
There are some positive indicators like better PMI number, increase in tax collections inspite of subdued macro environment and corporate performance not being that bad. So the final figure would be better than five percent that we saw now, in addition to that Q3 and Q4 remain. Though Q3 data would show bit weakness, but Q4 will definitely show some improvement.
We saw 5.4 percent in the first half and we could see 5.6 percent in the second half, Q3 being weaker than Q4 so by the end of the year we will could see a figure of about 5.4-5.5 percent.
Q: What are you expecting from January trade deficit number? What would surprise the street?
A: We expect trade deficit in January to be bit higher and close to five percent. The trade deficit will remain high and every month we will need inflows of USD 6-7 billion every month to meet the trade deficit. So, that remains a challenge.
Q: Will the RBI cut rates in March or holds its cards. What is your view?
A: We witnessed weakness in the past also. In 2002-03, GDP growth was about four percent and we have weakness today. Earlier, the weakness was caused by minus six percent decline in agricultural production due to drought but this year, agriculture remained positive. Typically, after drought year, the agriculture sector rebounds very sharply.
In 2002-03, industrial growth came at above six percent plus but this year the growth has been less than two percent. Industrial growth is slowing down which is in turn dragging down service sector which is linked to industrial growth. So therefore the situation today is more worrying compared to earlier.
Growth is widespread. In industry, we need to see more investment demand because the new project is getting shelved. New projects are not coming on and existing projects are getting shelved, we need to get that moving. So in that sense, Reserve Bank can play only a small role.
The rate cuts can have only a limited role and can help sentiment. The reason for blockage of projects needs to be addressed as it has a relation with happening on both fiscal and government’s side. Once these issues are fixed then investments will pick up, rather than looking at RBI for rate cuts.
Q: Earlier, Brent crude was at around USD 100 per barrel level for long time and currently it is around USD 119 per barrel level. Have you all changed estimates for what the current account deficit could be or what the import bill could be on the back of rising crude prices? Have you changed your forecast that perhaps crude is going to remain on elevated levels?
A: We always calculated that crude would remain on elevated levels as it is affected by events in geopolitical space. We import more than 80 percent of our requirements and crude imports are highly income inelastic. If crude continues to remain at these elevated levels, then certainly it would have a negative impact on CAD and will also hurt the rupee as well.
Q: You were speaking about investment turnaround or sentiment turnaround being more important than the Reserve Bank cutting rates. You are very close to the decision makers in the largest bank. What's the sense you are getting - any investment turnaround that the big wigs are talking about?
A: All the banks have this concern and all the chairmen have voiced it at the press conference that we had after the credit policy announcement recently. But everybody is concerned that investment is not picking up. Any increase in credit that is coming in, a lot of it is to do with the working capital finance and also refinancing.
This is what is driving credit growth rather than any fresh pick up in investment. Everybody has across the board expressed this concern Investments is not picking up due to many know reasons like labour, coal, connections not being given and untimely clearances. This is holding up investment and investor sentiment is hurt by these factors. Right now India’s growth is better than other countries around the world. So we are seeing some good inflows on the portfolio side. But how long this will hold up if growth doesn’t really pick up is a concern.