Jan 23, 2013 04:25 PM IST | Source: CNBC-TV18

Recent govt moves to pressurise RBI to ease rates: Ahya

Chetan Ahya, MD, Morgan Stanley, says that the move to hike diesel price is positive. The government‘s measure will create some pressure on RBI to act on rate cuts.

Chetan Ahya, MD, Morgan Stanley, says that the move to hike diesel price is positive. The government's measure will create some pressure on RBI to act on rate cuts.

Also read: Reforms kick start can lead Re below 53/USD: StanChart

Below is the edited transcript of his interview to CNBC-TV18.

Q: What is your view on diesel price increases and do you think it is going to be something that can have follow-through or might it go the petrolway?

A: The move to hike diesel price is positive. The probability of increasing diesel price in future looks high because the government has already demonstrated its commitment in the last few months in terms of its desire to change this bad growth mix that we have been going through for a while. 

Q: What about the credit rating issue because Moody’s has retained India’s credit rating outlook, do you think those agencies might be looking at India in a slightly more benign light after the events of the last few days?

A: I think the actions taken so far by the government have clearly taken us in a direction taking away the risk of a ratings downgrade. However, it is assumed that the government will continue to take the positive measures that they have been taking into future as well. For instance, if there is more demonstration in continuing with this diesel price hike by 50 paise every month for a few months, those steps will ensure that rating agencies are finally given consideration that the rating does not need to go down.

Q: There is some debate on implementation of the measures which have been announced and whether it can be done seamlessly particularly in the case of diesel, where would you peg your expectations?

A: The math is a little complex as you know because 18 percent of the diesel sold to bulk users has already been deregulated. If 100 percent of the diesel that is sold in India, for that if you have a cumulative price increase of Rs 5, it would reduce the overall subsidy burden in the country by 0.4 percent of the gross domestic product (GDP). So it would depend on how many months they will continue with 0.5 and if you do the math accordingly, you would be able to arrive at that number. It’s a big move and assuming that they cumulatively add Rs 5 by doing 50 paise, one will be able to see a 0.4 percent reduction in oil subsidy burden, in addition to the 0.4 percent reduction which has happened earlier, in September where they hiked it by Rs 5.

Q: Could this price increases have any real impact on consumption itself though and hence any impact on the current account deficit and oil imports etc?

A: Yes. Liquefied petroleum gas (LPG) and diesel both have shown sign of moderation in demand growth. Whatever reduction in subsidy burden that you see will effectively transmit into higher public savings, and savings minus investment is equal to current account deficit. So whatever the government can do to augment public savings will almost translate 1:1 into reduction in current account deficit.

Q: What you have made of the big movement we have seen on the rupee and the strength over the last few weeks?

A: We have two approaches for the rupee. First, looking from a fair value based on consumer price index (CPI) inflation. If CPI is used as a measure to assess real effective exchange rate then the fair value would be around 54-55. However, there is any risk aversion and capital inflow slow down, you will see an impact of rupee temporarily.

Q: How do you think the Reserve Bank of India (RBI) reads these moves on the diesel front, do you think it will heave a sigh of relief on the fiscal adjustment piece or do you think it will start fretting on inflation going up once again?

A: The government’s measure will probably create some pressure on RBI to act. So, we are expecting a 25 bps cut on January 29. However, if you look at some of the key macro indicators such as deposit growth, CPI inflation and trade deficit, we think ideally it would be better that RBI defers a rate hike to ensure that some of these critical macro stability indicators show some turnaround. Deposit growth has dipped to a new low of about 11 percent. Trends in deposit growth, CPI inflation and trade deficit will warrant a delay.

Q: What are your expectations on the CPI front that seems like the only wrinkle on the inflation front after the good data on the wholesale price index (WPI) for the last week or two?

A: We do expect CPI to come off. Food inflation is keeping CPI high. And that is very highly influenced by what happens to rural wages. We are finally seeing some moderation in rural wages. As long as that is maintained, which we expect so, you should see CPI coming down from second quarter of CY13.


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