Aug 06, 2013 05:43 PM IST | Source: CNBC-TV18

Don't see CPI below 7% in next six months: Morgan Stanley

Unfortunately, so far one has not seen a clear focus from the government to control CPI inflation. Therefore, it will go down, but it will still be around 7-7.5 percent by March ‘14, Chetan Ahya, Asia Pacific Economist, Morgan Stanley said.

Chetan Ahya, Asia Pacific Economist, Morgan Stanley does not see the consumer price inflation (CPI) coming down below 7 percent in the next six months despite government taking control of food prices, which is the prime indicator for the CPI index.

Also Read: Output in emerging market economies contract in July: HSBC

Speaking to CNBC-TV18 about the falling rupee, he says the currency depreciation pressure will continue due to high CPI, wide current account deficit and rallying US dollar.

Meanwhile, Ahya believes if the GDP growth for the next two quarters is 5 or sub 5 percent then the risk of another year of sub-5 percent growth increases significantly.

Below is the verbatim transcript of Chetan Ahya's interview on CNBC-TV18

Q: The rupee in quite a spot while you were negotiating traffic it has negotiated its way to 61.5 per dollar. What is the sense you are getting, will this weakness last for the entire year?

A: I would watch three key indicators for the direction of the rupee. Firstly, what is happening to the consumer price index (CPI) inflation in India, secondly, the current account balance which we can assess on the basis of what is happening to the trade deficit on a monthly basis. Thirdly, what is happening to the US rates and the dollar.

The reason why I am mentioning these three indicators is because in India we run a very large current account deficit (CAD) of USD 80-90 billion and want foreigners to fund it. But when they come to India they get zero real returns because CPI is very high at about 9.9 percent. So, we will continue to see currency depreciation pressures as long as the CPI is higher than 7 percent. CAD is higher than 2.5-3 percent and the US dollar and the US rates are rising. Therefore, these three combinations would be the indicators you would want to watch to assess when the rupee will stabilise.

We don't think CPI inflation will come down to 7 percent soon in the next six months and at the same time we don't expect the CAD to go down to 2.5 percent. In the next six months these currency depreciation pressures will continue to the extent to which we expect the dollar also to continue to rise in that period.

Q: Do you think CPI inflation could break down by the end of 2013 considering the huge cuts in growth and big tightening steps from the Reserve Bank of India (RBI) and maybe more is to come?

A: We expect inflation to moderate for the reasons you mentioned but we also need some other measures along with that which the government is beginning to take to control food price as CPI inflation is primarily driven right now by food. To the extent to which the government has started to work on it, it will help but they will need to do a lot more and keep a focused approach to control inflation.

Unfortunately, so far we have not seen a clear focus from the government to control CPI inflation. Therefore, it will go down but it was still be around 7-7.5 percent by March ’14.


Q: On Monday we got July services Purchasing Managers’ Index (PMI) which has contracted for the first time in four years, plus a lot of economists are lowering their gross domestic product (GDP) estimates. Where does Morgan Stanley stand and have you lowered your growth forecast further?

A: We are already at sub-5 percent for two quarters and June quarter will probably be around that number. The way the monetary policy has moved, it has been tightening in pro cyclical manner. So, with that pro-cyclical tightening as well as the global uncertainty either capital market uncertainty, we are not going to get capex recovery. Unfortunately, exports are also taking time to pickup and as exports have dipped 4 percent in the last month.

A combination of weaker exports and capex not picking up, at the same time the consumption is likely to remain weak. We are in a situation where we could see cumulative about 4-5 quarters of 5 to sub-5 percent GDP growth. If you get a slowdown for four-five quarters, that duration will then become very painful for the banking system.

If you have high rates, low growth for four-five quarters will indicate that non-performing loans (NPLs) in the banking system will begin to shootout and so the next two quarters are very important. At this point of time it will be 5 or sub-5 and to that extent, I will be conscious of the vicious loop unfolding because of the implications of this on the banking system.

Q: What do you mean by the vicious loop, are you saying that we are likely to remain in and around the 5 percent GDP mark for a long bit, even for FY15?

A: Yes precisely. The risk of that situation arising is increasing and the next two quarters will be quite critical to watch. If the next two quarters are of 5 or sub 5 percent kind of growth then the risk of another year of sub 5 percent increases significantly because of the implications arising out of it on the banking system, on the fiscal management and the implications of foreigners confidence and balance of payment funding.

Q: The US economy is recovering; Europe appears to have come out of recession, according to the latest euro zone PMI numbers. Do you think we could get some relief via an export led growth sooner rather than later?

A: We were thinking that this would be an important driver to growth and exports will pickup. Unfortunately to the extent to which the last quarter’s data has been weak, our confidence that the exports will come in a big way to rescue India’s growth trajectory seems declining with the way the data is panning out.

The US this time is not coming back as a consumer; it is seeing a significant pickup in capex and that is how its growth is recovering which then would mean that its dependence on other people to increase its imports is reducing. So, the US growth this time is bringing more bad news than good news for us.

Q: Where does all this leave the RBI? Is the possibility of rate cuts completely out of the picture for the whole of fiscal year FY13? Is there a possibility that the RBI will tighten further because today we have seen the 10-year go to levels of 8.27 versus Monday’s closing of 8.20 percent?

A: To the extent to which the RBI has already moved on tightening the short-term rates by about 200 bps or so, we think for the moment this is enough. According to the communication from the RBI, these moves are temporary and that is taking away the forward looking fx market confidence that the yield provided on the currency will sustain for longer period.

If they can actually do something in their communication which gives confidence to the market that the tightening will prevail until the time the currency stabilises or will probably do even more if needed, that is what we need at the moment. However, if that doesn’t work and it seems to be a question mark in the currency markets then an increase in repo rate of about 25-50 bps will be the way out to convince the market that the RBI means business when it hikes the short-term interest rates.

Q: You already referred to the non-performing assets (NPA) increase that banks might see. Given the slowdown, what will be the credit growth for FY14?

A: The credit off-take will be quite weak. We think credit growth is heading towards somewhere around 10 percent with the way the tightening has happened right now and therefore, it will be very difficult to revive growth in the next two quarters because of the tightening that the RBI has taken.

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