JP Morgan sees RBI cutting repo rate by 25 bps in June policy and to take a big pause after that. It adds that central banks world over are struggling with fall in industrial growth, which has led them to cut rates.
Jahangir Aziz, Chief Economist, JPMorgan believes that Reserve Bank Of India will take another 25 basis points rate cut in upcoming monetary policy in June, but will take a big pause on easing front post that.
RBI in its monetary policy on May 3 cut the repo rate by 25 basis points but raised concerns over still high inflation and current account deficit. Sounding hawkish RBI cautioned that there was very limited room for further easing in monetary policy.
Aziz expects index of industrial production to grow at 1.7-1.8 percent against street expectation of nearly 2.3 percent growth. He also expects current account deficit to significantly decline from 6.7 percent in October-December to 3.5 percent in January-March.
“As long as commodity prices and gold prices remain broadly benign, we are probably going to get current account deficit (CAD) for Q2, which is probably even lower. So we have moved a CAD number down quite strongly,” Aziz said.
He further noted that across the globe economies are experiencing fall in industrial and services growth as indicated by softening Purchasing Managers’ Index (PMI) data, which has compelled central banks of many countries to cut interest rates.
Below is the verbatim transcript of the interview
Q: Fairly wide range for index of industrial production (IIP) this morning, where do you stand at in terms of what the figure could look like?
A: We are below consensus around 1.7-1.8 percent. We have had two pretty strong months on momentum wise, month-on-month growth rate plus we had seen last month a pretty strong capital goods production number, unlikely that is going to get sustained. Around 1.7-1.8 percent is where we think the number will come out on a year-on-year (Y-o-Y) basis.
Q: That capital goods figure tends to be quite lumpy in nature. Would you be overly cautious or worried if indeed it was not as strong as a performance as February turned out?
A: We feel the capital goods number will give up some of the gains that it made last month. So, we are bracing for a pretty low capital goods number. That has been the case almost for the last three-four years now. It has never shown any sustained month-on-month increase beyond couple of months.
Q: There was some disappointment around the Purchasing Managers’ Index (PMI) data that we got a couple of days back especially with reference to the manufacturing PMI. Despite what the IIP reports, what do you make of how manufacturing trends are moving?
A: This is almost like a global phenomenon right now. If you look at almost every country, you have seen PMI numbers softening, you have seen IIP numbers softening and you have seen questions being raised about whether or not we as economists are going to change our growth forecast numbers. You have seen Central Banks react to that by easing and not just India but Bank of Korea did that, Reserve Bank of India (RBI) did that. Basically apart from Brazil, almost every Central Bank seems to be on the verge of easing and not just Bank of Japan.
So, in a sense we are getting to this point where the higher frequency numbers are telling us that the global economy isn’t going to be as strong as we had once thought at the beginning of the year.
Q: Incrementally though some of the macro data points for us have been improving whether it is what we saw in terms of inflation trends or what has been happening with the twin deficits. At JP Morgan have you changed estimates around any or do you think these are too nascent the kind of moves we are getting so far?
A: On the inflation number what we have done is to move our inflexion point. We think that inflation is going to turnaround away from May, June to probably little further down the road in July, August largely because of the more benign commodity prices.
We think that we are probably going to get pretty strong current account number in Q1 probably close to around 3.5 percent, which should be a very big change from 6.7 percent print for Q4. As long as commodity prices and gold prices remain broadly benign, we are probably going to get current account deficit (CAD) for Q2, which is probably even lower. So we have moved a CAD number down quite strongly. As I said the much more benign commodity prices has made us move our inflexion point where we think inflation is going to turn back around, probably towards a later part of the year.
Q: We did see more of the same from the RBI in their last policy meet, basically a rate cut plus extremely cautious overtones to how they see the economy moving, what would you expect to see in terms of rate relief for the rest of this year mostly done you think or would they continue to ease?
A: RBI has been lamenting the lack of space in April as well as two weeks back. My guess is that the data isn’t going to give the RBI anything to hang his heart and say, it is time to take a pause. I think you are going to see inflation roll down, the CAD come off, IIP numbers are going to remain soft. So, our sense is that in the June policy review, RBI probably cuts another 25 bps. After that they will probably get to see inflation numbers turning around and that is the time that they will pause. How long, that is debatable. One more rate cut is what we expect in June.
Q: Ultimately, though it all boils down to growth. On that parameter are you feeling any more confident in terms of whether or not you think there is an upward bias now to your growth targets or whether that is looking to improve at all?
A: I would say that the economy did bottom out on Q3 of last year. Q4 was a reasonable turnaround mostly driven by manufacturing, again the Y-o-Y numbers completely and totally obscured that but if you look at the quarter-on-quarter (Q-o-Q) numbers, you do get to see this.
Our sense is that this turnaround will probably remain pretty modest both for the first and the second quarter of this calendar year and maybe post the monsoon season, once the government starts spending on its capital expenditure front, you might get some lift taking place both in terms of consumption as well as in terms of infrastructure activities particularly in the rural economy. So we are little bit more optimistic about the second half of the year but not very much. So, overall we are looking at a growth rate probably by 5.7-5.8 percent.
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