Dec 03, 2012 04:05 PM IST | Source: CNBC-TV18

No rate cut in Dec; maintain 5.5% FY13 GDP outlook: CLSA

The economic growth is now heading to low level stabilization Rajeev Malik, senior economist, CLSA said in an interview to CNBC-TV18.

India's economy grew at a lower-than-expected 5.3 percent in the quarter ending in September. The manufacturing sector grew an annual 0.8 percent during the quarter while farm output rose 1.2 percent. In the June quarter ending economic growth was at 5.5 percent.

The economic growth is now heading to low level stabilization Rajeev Malik, senior economist, CLSA said in an interview to CNBC-TV18.

The GDP data on an annual basis has been hovering in the 5-5.5 percent range for about three quarters, so one should not expect the data to be substantially different in the December quarter. The economic growth is likely to seen an uptick from March quarter (Q4FY13) onwards, he added.

The broking firm still pegs the Indian economy to grow at the rate of 5.5 percent in the current fiscal year and 6 percent next fiscal year.

Meanwhile, given the high inflation, the central bank is not seen obliging the market with a rate cut in its December policy.

"The inflation dynamics especially at a medium-term level are going to be higher than what they have been aiming at. A part of it could still be construed that growth is going to become more important, so they may want to revive growth even at the expense of slightly higher medium-term inflation," he elaborated.

The Reserve Bank may start easing from January onwards. CLSA expects 100 bps repo rate cut over in calendar year 2013.

Below is an edited transcript of the analysis on CNBC-TV18.

Q: What do you think lies ahead for the year now? Are you confident that economic growth has been bottoming out for the last two quarters?

A: I think so. I think a low-level stabilisation is taking hold. The y-o-y GDP has been in the 5-5.5 percent range for about three quarters now. On a sequential, seasonally-adjusted basis there is a broad range of momentum which indicates that a low-level stabilisation going on. The December quarter is not going to be substantially different. I think it is only in the March quarter that there will be an element of uptick and then that will pave the way for a slight improvement in FY14.

The GDP was broadly in line with expectations and our own full-year forecast still stays at 5.5 percent for the current fiscal and 6 percent for the next fiscal. Though this is not really a number that justifies raising forecasts per se, it has reinforced the notion that the downside is better protected.

Q: Does anything from the economic data make you confident enough to forecast that the GDP for FY14 will be over 6 percent because from a market perspective that is far more material?

A: I agree. But do not forget this was a September quarter data and if you recall, it was around mid-September, when the government finally woke up. So while asset markets have discounted more meaningful policy action, their impact on the real economy is going to be with a delay and much more protracted.

So, at this point, I think the most meaningful element is going to be what all the government can do to create a more enabling environment as far as the investment upturn is concerned.

There are news reports that finally sometime this week the Cabinet will take up the National Investment Board (NIB) proposal. So I think while it should not be seen as a panacea for all the macro-economic problems India has, I think India will be better off with it.

Even if there is some improvement, India is in for a much more protracted adjustment on the macro. The asset-market’s behaviour has other dimensions including global liquidity. So given a high beta market in a low beta economy, the moves may not somewhat be in sync.

Q: What do you think the Reserve Bank will take away from all this? In December, do you think it is just the CRR that it aims to tweak? What should one expect starting January?

A: I think the RBI is going to hold on to rates stay in December. I am not sure the inflation will allow the RBI to actually justify a rate-cut just yet. But I do think beginning January the RBI will begin to ease, and I still stay with our expectation, about 100 bps on the repo rate over the course of calendar 2013.

Over the weekend, the RBI governor indicated that perhaps the central bank might re-check its medium-term inflation forecast of 4-5 percent. I think this is an embarrassment for the RBI. The inflation dynamics, especially at a medium-term level, indicate inflation is actually going to be higher than what the RBI has been aiming at. I think this indicates a change in priorities and the RBI wishes to revive growth even at the expense of slightly higher medium-term inflation.

Q: What is your own observation on the kind of liquidity flowing into the market through the capital market and the easing of FII debt limits to bring the current account deficit down?

A: This has been one of the key recurring themes throughout 2012. While the macro-economy has progressively worsened over the course of the year, FII inflows have actually held up remarkably well and post-September, picked up even more dramatically.

I think one of the reasons for that is that monetary policy formulation is far from comprehensive and the government is just trying to reflate the economy. Increasing FII limits in debt at a time when there is a lot of global liquidity could prove disastrous when the US interest rate cycle turns.

In the meantime, the government needs to implement more meaningful steps to revive the that will enable it to deal with such an outcome if it were to happen. Instead, there is an excess of external liquidity in the market. It is often mistaken that good equity markets necessarily require good macro-economic developments. There can be economic situations where easy liquidity coupled with poor macro-economic factors can actually be potent force to boost the markets.

Q: Do you think some mechanism could be established to deal with long-term fiscal problems or even broader growth issues which might actually pay off if not immediately, next year maybe 2014 onwards?

A: Eventually a mechanism will fall into place, but do not forget there is also going to be a general election and how much change that is going to bring about, remains to be seen. A lot more needs to be done as the markets are only stabilising. It is difficult to say if the economy will be better at an accelerated pace.

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