The Reserve Bank of India's next policy meet is on June 18, 2012. Indranil Pan, chief economist at Kotak Mahindra Bank doesn’t expect the central bank to take any policy action in June.
He expects another 25-50 bps rate cut in FY13. “But our belief is that it would more happen in the second half of the financial year than in the first half,” he adds.
Below is the edited transcript of his interview with CNBC-TV18's Sonia Shenoy and Ekta Batra. Also watch the accompanying videos.
Q: If you look at this hike in petrol prices, not in isolation, but as a part of a broader strategy to increase administered prices and eventually reduce subsides. Do you expect to see a big relief on that account, if something comes out tomorrow from the EGoM meeting?
A: I think that definitely is likely to be a positive. The implication of petrol price hike on the inflation is about 10-15 basis points, but it doesn’t do anything to the fiscal deficit. The diesel and the LPG price hike is likely to bring down the levels of subsidy bill under the fiscal, which actually has the balloon to a very significant extent because of the depreciation in terms of the rupee. So, I think that is definitely a positive step. It would be viewed positively by the investors.
But I think a lot more needs to be done in terms of trying to project that India is an investor friendly country. There needs to be certain steps that need to be to be taken to revive the capital capex cycle, which will obviously take sometime. So, I am not really expecting a very sharp turnaround in the rupee. But sentiments can actually stabilise and we might find a new range for the rupee in the 54-56 bracket. Possibly that would prevent any sharp further depreciation of the currency.
Q: What is your perspective with regards to any sort of sensitivity analysis that you might have gone with diesel price hike? If we get a price of say Rs 5, what impact would that have on inflation and the fiscal deficit?
A: The fiscal deficit, to a certain extent, is also dependent on what is the incremental currency view that happens in the market. If I get a lower currency because of some turn in the sentiment, then the impact would be lower in terms of the diesel price. So, we have not really quantified the extent very clearly.
On the inflation side, to a large extent, the diesel prices would be about 40-50 basis points incremental in terms of headline inflation. If there is a LPG price hike to the extent of Rs 25-30, we can see the direct impact about 60-70 basis points. That will also have a second round impact in terms of the inflation dynamics.
Q: We have seen cuts in GDP forecast by big banks like Morgan Stanley etc in the past many days. Morgan Stanley has cut the GDP target to 6.8% from 7.5%. Would you have any scale down in your GDP estimates, given the kind of macro worries we have had both in the form of fiscal deficit and the rupee?
A: Incidentally, we had been looking at these macro worries for quite some time. We were never really expecting that even with policy rate reductions by RBI, we would see a big upswing in terms of the investment cycle. I think the key reason why we were not anticipating a big upswing out of policy interest rates is one because we were clearly indicating that there is some sort of liquidity tightness that would continue. High government borrowing programme would also lead to preemption of funds by the government, typically the crowding out effect. So, the corporates might not benefit significantly with lower borrowing costs.
Secondly, the visibility of demand from the global world is so weak that it doesn’t really make sense to add capacity immediately by the manufacturers. So, we had factored in all these issues way back in May 2011. We had projected FY13 GDP growth number at 6.6%. That is where we are holding at this point in time.
The next round of possible revisions could be timed with the incremental information flow that happens. For example if Greece ultimately exits the euro and there is a sharper recessionary trend globally, we might have to reduce it lower or if monsoons fail in a significant way that can be another cause for worry.
Q: In light of all of this, how do you think the RBI is possibly going to move when they meet in June?
A: June, we are definitely not expecting any policy move from the RBI. Definitely not a repo rate cut because inflationary pressures continue to remain strong, aggravated also by the fact that the rupee depreciation has been significant over the last one-one and half months. That’s number one.
Secondly, the CPI has also moved significantly higher. Though the RBI clearly does not look at CPI immediately as a policy tool, but some sort of a weightage would obviously be given to the CPI. That’s number two.
I think the third issue is that we were looking at probably a CRR cut on the basis of our expectation that there would be huge amount of dollar sales by the Reserve Bank. But what possibly has been happening is that their spot market intervention has been lower and they had been more sort of selling dollars in the forward market. That obviously doesn’t have a rupee liquidity implication for the immediate term. So, they would possibly like to retain back the CRR firepower also. Hence, we are not really looking at anything in the June policy.
Q: We have that one inflation figure that comes out as well before the June policy. If we do see like you said a 60-70 bps pressure on inflation because of the impending hike in diesel prices, what would your target be on inflation?
A: Yes, the diesel prices will have an impact on inflation. But because it comes so late in the month, we might not be factoring in the full amount of diesel price increases and LPG price increases into the May inflation number. That’s the number that will be announced in June.
The bigger increase in the inflation number would be for June where the whole effect would be factored in. But as I said I think the inflation pressure firmly remains. There is definitely a stickiness for inflation. So, I would not really look at anything lower than what inflation was in the past month.
Q: How do you expect the RBI to move throughout 2012, considering that inflation is possibly going to re-emerge on higher levels?
A: We have been factoring in possibly another 25-50 basis points cut in the repo through FY13. But our belief is that it would more happen in the second half of the financial year than in the first half. So, what possibly the RBI would be waiting for is the growth trajectory that emerges in the FY13. We really don’t have too much of a significant indication for that immediately.
The point that I am trying to make is that RBI’s growth target has been 7.3%, if it actually materialises much lower like ours 6.6% or maybe 6.7%, which clearly means that there is an underperformance of the economy. Along with that, if there is further risk aversion globally, that also would possibly prompt RBI to move. But we are still factoring in a 25-50 basis point reduction in the repo. More timed with global events as well as some domestic factors, but the point that is being made, it would be event based.