Economists Samiran Chakrabarty of Standard Chartered Bank and Shubhada Rao of YES Bank discuss on CNBC-TV18, in the backdrop of a rise in the current account deficit to 5.2 percent, that the RBI may cut rates gradually to support growth and stem the impact of the rising fiscal and current account deficit.
Below is an edited transcript of the discussion on CNBC-TV18.
Q: How do you think yields might move? Will it touch 7-7.75 percent in this quarter?
Chakrabarty: About twenty days ago, we turned 'overweight' on bonds aiming to buy 10-year G-Sec at 8.20 percent targeting take-profit levels of about 7.80 percent. I think that trade has worked well for us. We bought bonds with two aspects in mind. One, was an easing of monetary policy and second, probably the market was ready for a lot of excess supply but compared to that the OMO amount would be higher. Our basic presumption was that the RBI would support the market. So clearly holding onto that trade looking at 7.80 percent on bond yields is kind of a no-brainer if the RBI delivers on a rate cut on January 29.
Q: According to data released on Monday, the current account deficit (CAD) is at 5.4 percent for the previous quarter. How difficult do you think controlling the CAD is possibly going to be in FY13? Do you think it might get worse?
Rao: The risks to the fisc will definitely increase with the CAD worsening further from 4.2 percent. This has prompted us to review our estimate which indicates that the third quarter is also going to be stressful in terms of the CAD-GDP ratio at 5.4-5.5 percent.
The CAD will be tough to rein-in as the challenges to the economy remain- there has not been any improvement in exports and imports continue to gain strength and robustness. And it is unlikely that this direction is going to reverse very quickly. So the high level of CAD is something that will have us worried at the closing of the fiscal year and going into the next year as well.
Q: The rupee has not been reacting to the increase in the CAD and other worrying economic data because of excellent FII flows. But do you see the situation coming to a head in 2013?
Chakrabarty: To be honest, the data released on Monday was related to the quarter-ending September, so obviously the markets did not react to it. But if you look at the rupee movement in the October-to-December period, I think the depreciation in the rupee was primarily because of the trade-deficit data being much higher than anticipated and the data will start to reflect on the current account only in the release of date in March. So we are still way off from CAD-GDP ratio peak.
Q: What kind of peak do you expect?
Chakrabarty: The peak could be even higher. Let us also understand that the Q3 GDP is most likely to be soft. But if the trade deficit numbers keep improving and the FII inflows continue then probably there could be some support for the rupee in Q4, though it is only going to be a very modest. As long as the monthly trade deficit stays above USD 15 billion, I think the pressure on rupee is not likely to reduce.
Q: Would you expect a very volatile rupee for 2013? What is the range for 2013 for the rupee?
Rao: I do not entirely agree of the occurrence of a severe risk-off. US economic data does seem to suggest that, on a sequential basis, there is marginal improvement. Yes, the eurozone risks will continue to persist, but with the greater risk of the fiscal cliff showing some semblance of control, there will not be any worsening-off of appetite in terms of risk, going forward.
There are expectations of improvement in the domestic macro-economic factors. So capital flows to that extent will begin to improve. There has not been any sharp, dramatic recovery in most of the macro-economic factors, but it is definite that they will be much better in 2013 as compared to 2012.
With all these macro parameters going to be supportive of capital flows coming into the economy which, in my opinion, will be more supportive to the rupee. I estimate a broad range of 52-55 persisting. For the rupee to touch 57, there needs to be some very sharp adverse and negative news. Overall, I think the rupee could be ambling between 52-55.
Q: What exactly do you expect from IIP and growth in general? What do you think the RBI will do on January 29?
Chakrabarty: I think the November IIP would be pretty low and this has already been factored-in by the market. In terms of RBI initiative, the signal is quite clear that there will be easing. We expect a 100-basis point rate-cut from RBI over the course of 2013. But it remains if it will be frontloaded. At this point of time, I think it would be best for the RBI to initiate a gradual 25- bps rate-cut.
Q: So you expect a 7.8-percent on the bond despite estimate only a quarter basis rate cut?
Chakrabarty: Absolutely. The markets will start pricing-in more rate cuts regardless of whether there is a rate-cut of 25 or a 50 bps. So in that sense, 7.8 percent is still a possibility.
Q: What is your forecast for growth and the RBI’s policy on January 29?
Rao: I tend to estimate a 100-bps cut for the full year of 2013. I agree that the RBI could adopt a step-by-step approach as the current account deficit and fiscal deficit continue to rise. So, I don’t think a 50-bps cut in one go is what the RBI may be looking at on January 29.
Forecasting growth, I expect the third quarter to remain sideways at 5.3 - 5.6 percent but more importantly, in the fourth quarter I believe that growth could get back to over-6 percent. MY own estimation is at about 6.3 percent. For the full year, I estimate a growth of 5.7 percent for fiscal 2013.
Q: In your estimate, considering the rise in fiscal deficit and the current account deficit, how much emphasis will the RBI place on deficit vis-à-vis growth and inflation?
Rao: Predominantly, the RBI is going to be looking at expectations and trajectory on inflation in terms of shaping the policy and extent of rate cuts going forward. Growth is falling and to support fiscal discipline, along with growth there is a need for tax buoyancy. To that extent, I believe the RBI would favour supporting growth.
To manage CAD, I think the RBI will adopt a piecemeal approach of cutting rates gradually by 25 bps to contain the stress on the current account.
Q: What is the inflation trajectory for FY14?
Chakrabarty: We are looking at something of a 100-120 bps decline in average inflation over the year, assuming that the global commodity prices remain soft and don’t spring a surprise. The process of inflation control is in line. The capacity utilisation levels are very low. So I don’t expect inflation to throw a surprise. Obviously, I don’t know whether diesel prices will be increased by Rs 1 every month or not.