May 28, 2013 03:31 PM IST | Source: CNBC-TV18

India has no case for rating upgrade: CLSA's Rajiv Malik

Rajeev Malik of CLSA told CNBC-TV18 believes India is still facing the risk of a downgrade.

Not the one to frown on recent talks of downgrades by rating agencies, Rajeev Malik of CLSA told CNBC-TV18 that India doesn't fully appreciate the sovereign rating process operation. "I don’t think there was ever any case for rating upgrades." He even believes the country is still facing the risk of a downgrade.

He appreciates the steps taken by government on policy front, but believes such measures need to continue if India is looking to draw global liquidity in the next 12 months.

Below is the verbatim transcript of the interview on CNBC-TV18.

Q: You are expecting a sub 5 percent number again for this quarter, is it?

A: Absolutely. I think it will give slightly better than the December quarter but still be below 5 percent, more like 4.9-4.8 percent kind of a range. Do bear in mind, while optically the headline number will show some improvement, I tend to track non-agriculture GDP closely as well and I think that will remain unchanged at about 5.2 percent. In fact had it not been for a favourable base impact, the year-on-year number for non-agriculture GDP would have actually been slightly lower. So all in all, more of a bottoming out trading the bottoms kind of a setting as oppose to any quick dramatic or strong turnaround taking shape.

Also Read: Why Chidambaram doesn't yet deserve an upgrade

Q: For some time your view has been that the recovery could be slightly erratic in nature. Given that, what are you expecting in Q1 and Q2 FY14? What kind of growth numbers could you be looking at?

A: They will be slightly better on a year-on-year basis compared to what we saw in the March data. One of the big moving parts that nobody really has a good handle on is what kind of revisions we will see to some of the past data. But incrementally, headline numbers will show an improvement. The critical question is really going to be that is it one of those pedestrian improvements or any kind of lot more palpable tangible improvement? I think it is going to be much more of a second half scenario. But essentially to really talk about a genuine recovery, it would have to be more of a post election scenario.

Q: What do you think will be the most disappointing internal of the GDP figure when we get it? The disappointment really has been flowing through on industrial production numbers, manufacturing growth - those have been struggling.

A: Those would be reasonably similar to what we have seen in the monthly trajectory. Agriculture will be one important swing factor but I think the profile on the services side would really be important; partly because if you look at some of the indications from sequential PMI readings, those have been softening. While everyone in India looks at year-on-year GDP growth number, that will hold similar to the last quarter only because of a favourable base impact which is part of the reason I mention that incrementally, don’t hold your breathe for any kind of dramatic improvement.

Q: There was some observation from the rating agencies recently when they didn’t seem to support any case for a re-rating for India or change in the rating outlook for it. Do you think they will have cause to do that through the course of FY14 or will it remain a struggle?

A: When you say change in ratings, I don’t think there was ever any case for rating upgrades similar to what some of the government officials had been talking about. I think it only goes on to show that India really still doesn’t fully well appreciate how whole sovereign rating process perhaps seems to operate. Is there a risk of a downgrade? I think the risk is there. It just depends on how things evolve. Some of the pressure points have lessened certainly with commodities coming off and the government actually having undertaken some long overdue steps.

But this has to be a continuous process. It can't do it and then go off to an hiatus of sorts; which is why I think one of the biggest issues over the next 12 months is really going to be with global liquidity cycle and how it impacts India. Don’t forget, India has been an important beneficiary and has suffered much less despite a multiple imbalances because of that easing global liquidity conditions. So even if it is a gradual shift on that front, the fallout has to become more visible as far as Indian macro is concerned.


Q You would have noted the note of surprise that has been struck from the finance ministry off late about the way the rupee has come down to 56 (to a dollar). They seem quite baffled about what could have been the cause. Are you surprised?

A: Not at all. I think this is something we have been talking about since the beginning of the year about the follow up from potential US dollar strength. I think this is one area which has been consistently ignored in India because the simplistic assumption or thought process has been that as long as there is adequate capital flows to finance the current account deficit, the rupee should be okay. Lo and behold! You have seen for example the Singapore dollar which runs 15-17 percent of current account surplus also weakening. Don’t forget, exchange rate at the end of the day is a relative price. While the trajectory for dollar strength is not necessarily going to be linear or extremely dramatic, over the next 12 months you are going to see more of that which is why after possibly some kind of respite in June because of some bunched up capital flows, I think rupee is poised for further weakness. I think it would be irresponsible for Indian policy makers to prevent that especially when all the other currencies are weakening against the dollar. They can fight it but it would be kicking the can down the road rather than really fixing the underlying issues.

Q: The other thing which has happened is that the bond market since the last inflation number has got more and more certain that much more aggressive rate cuts are coming from the Reserve Bank of India (RBI). Are you expecting one in June?

A: I think the local bond market is celebrating an early Diwali. I think they are misreading quite a few things, not so much in terms of the WPI number per se. Don’t forget, much of the action actually didn’t happen the day the inflation number was reported. It actually kicked off a day after that to a large extent on a misquotation or a misreporting of what RBI governor had said in one of his overseas trips. Don’t also forget, over the last three meetings, we have seen in the run up to the meeting, bond markets tend to become rather perky only to be somewhat disappointed either because the outcome is inline or because it hadn’t exceeded expectations. The move in yields this time around has been a lot more pronounced but I do think the bond market is misreading RBI’s signal. I have even heard points about how liquidity is going to improve so much so that the reverse repo will become the operational policy rate - that’s almost practical impossibility. RBI moved to a single policy rate in 2011 and part of the reason for that was they will have to keep the system short. So my sense is that a rate cut is more likely in July rather than June simply because RBI will have a better setting in terms of what the monsoon shapes up. But equally, RBI is giving more weight to retail inflation even if it is not explicitly saying so.

Q: Are the rate cuts amounting to much though in terms of real impact on the economy. Up until now they have already cut about 150 bps from where they started off. It is just not moving the dial at all.

A: Don't forget there are different channels through which transmission works. If you look at for example the bond market, if you look at wholesale rates, there is actually pretty good transmission in those areas. The area where transmission has been lacking is really in terms of banks lending rates and I think there the issue has more to do with what’s happening with loan deposit ratios. One of the angles there of course is the low mobilisation or slow mobilisation as far as deposits are concerned which brings me back to why RBI needs to give more relevant weightage to retail inflation. So, in a way, it all comes back together and part of the reason why bank adjustment on lending rates is not happening is because of that retail inflation and deposit mobilisation.

Q: We are just winding down Q4 earnings season which is frankly nothing special especially in core sectors like industrials, etc. Would you say there is a risk of your Q4 GDP target being missed on the downside rather than a surprise on the upside?

A: The way India does its GDP number- that's always the possibility, but bear in mind, the moving part is really in terms of the fact that since middle of 2012 when the government finally woke up, there has been a lot of hope and anticipation about how the rally in the equity market will trickle down. But all the evidence on the real economy is saying that things are not necessarily improving. It's a different matter when you look at equity prices though.

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