In an interview to CNBC-TV18, Sajjid Chinoy, economist, JP Morgan, says he expects the RBI to cut 25 bps in its January 29 monetary policy. Sajjid says, "The market is slightly ahead of itself. We still expect a 25 bps rate cut in January, but I do not think we are on the verge of embarking on a very massive rate easing cycle in 2013."
Chinoy also says that the market is discounting a retail diesel hike and is forward looking. He adds, that despite everything, the Government has shown an intention over the last six months to tackle the oil subsidy issue. However, he adds, "For that intent to translate into any kind of meaningful fiscal or macro economic adjustment, you have to see sustained execution. "
Below is the edited transcript of Chinoy's interview to CNBC-TV18.
Q: Bulk diesel is going to be included in the Wholesale Price Index (WPI) series. How much do you see it impacting the headline reading?
A: Bulk sales are about 18 percent of total sales and those prices have now gone up about 20 percent. So, the direct impact is going to be somewhere in order of 18-20 bps. However, there will be a meaningful second round impact. For example, the cement producers also purchase in bulk. So, this could be in the vicinity of about 30 bps eventually after taking into account both first and second round impacts just from the bulk diesel increase.
Q: How hopeful are you on the retail diesel front? Do you think the market may have run ahead of itself in discounting that the price will be raised by 50 paise in the next 24 months and that the gains will come from this move?
A: Markets are forward-looking and at some level it is understandable what the market reaction is. Let's give the Government its due. One can quibble about what the actual savings are, but there is finally a very real intent by the government over the last six months to tackle the oil subsidy issue.
For that intent to translate into any kind of meaningful fiscal or macro economic adjustment, you have to see sustained execution. The diesel under-recovery today is over Rs 10/litre. If prices go up by 50 paise a month, you will need to have price increases for the next 10-12 months to take a significant dent out of diesel under-recovery. So, the simple point is, you can only get meaningful fiscal savings if this process continues for another 14-15 months. If we just have price increases till say June of this year then the total fiscal savings from last week’s actions will be very modest- only about 0.1 percent of GDP on the budget. However, if you include what happened in September, it is bigger more like 0.3 percent of GDP.
Q: Reports suggest that by cutting the plan expenses, the Finance Minister will manage to report a deficit figure which could even be less than 5.3 percent. How will the market read into such a reported figure?
A: It will be sort of bitter sweet. Firstly, they will be relieved that there is no runaway fiscal slippage. Remember, S&P and Fitch are keeping a close watch on the fiscal outturn. We had run the risk 6 months ago, that if this year’s number came close to 6 percent, then a ratings downgrade would be imminent. So, I think there will be relief that we are on the path to fiscal consolidation.
My worry is, will this be actual fiscal consolidation and withdrawal of fiscal stimulus or will this be fiscal postponement? I worry for the slash in plan expenditures because that means that you enter next year with a significant overhang of expenditures and achieving next year’s fiscal deficit number of 4.8 percent becomes extremely challenging especially if growth does not pick up all that much. So, I think the devil will be very much in the detail of how we got to this year’s number, which is why action on subsidies is going to be ultimately what decides whether we get actual and sustained fiscal consolidation.
The oil subsidy bill will have to be reduced, there will have to be some increase in urea prices to bring the fertilizer subsidy bill down and we will have to contain the Food Security Act. That is the only way you can stay on a path of fiscal consolidation without compromising planned expenditures.
Q: Has the bond market adjusted to the possibility of just 25 bps repo rate cut in this policy? Or is it still reflecting a slightly aggressive easing?
A: I think the markets are slightly ahead of themselves. We still do expect a 25 bps rate cut in January, but I do not think we are on the verge of embarking on a very massive rate easing cycle in 2013. I just want to point out that Current Account Deficit (CAD) between October and December quarter is on track to being well above 6.5 percent of GDP. That is going to give the central bank some pause. If your current account has doubled essentially over the last year, the time may not be right to slash interest rates. I do think there is space for some monetary easing early in the year given what the momentum of core inflation has done in the last few months. However, I think the RBI will be quite cautious easing rates in 2013 based on their experience from 2012.
Q: How are you seeing trade deficit panning out?
A: There has been some moderation from very high levels in October and November. Our December print is about USD 17 billion for the month compared to USD 20 billion two months earlier, but USD 17 billion is still an unsustainably high number. We will get some moderation because there are indications that exports will pick up as the global economy recovers. However, if India's growth is to re-accelerate in 2013, which is what most people expect, then imports will go up as well and non-oil, non-gold import demand will increase as well. So, the combination of crude prices going up, gold demand staying sticky and non-gold, non-oil imports picking up as growth re-accelerates, all of this will offset much of what is going to happen on the export front.
So, we are still working with 4 percent to GDP CAD for 2013-14 which is possible to finance in a perfect world if global liquidity is easy and policy at home is constructive. However, it is a very large deficit. So, if you have any kind of shock either external shock or domestic politics or policy shock, the rupee could come under significant pressure later in the year weighed by such a large CAD.