Jul 22, 2013, 05.13 PM | Source: CNBC-TV18

FY14 GDP growth risk at 5%; mid-term eco 'stable': Moody's

Atsi Sheth of Moody's Investors Service says that the GDP growth forecast may remain at 5.5 percent with a downside risk of reaching at 5 percent. However, she told CNBC-TV18 that the outlook towards the economy was 'stable' currently.

Atsi Sheth

Senior Vice President, Moody's

More about the Expert...

The forecast for GDP growth in the Indian economy may be at 5.5 percent with a downside risk of a 5 percent growth, says Atsi Sheth of Moody's Investors Service.

In an interview to CNBC-TV18, Sheth says that the current trend in the economy reflects of a prolonged slowdown. The steps by the Reserve Bank of India (RBI) were implemented only to stabilise the rupee and not appreciate it, she says. So, the possibility of hikes in rates will not pull back the economy in the current and the next quarter, she says. However, there is no danger to sovereign rating to the ‘stable’ outlook in the medium-term, Sethi adds.

Speaking on deficit levels in the economy, she says that the fiscal deficit could be a challenge due to the growth constraints while the current account deficit (CAD) will continue to be credit constraint.

Also read: Sovereign downgrade risk still on table for India: DBS

Below is the edited transcript of her interview to CNBC-TV18.

Q: We have had some bad data; Index of Industrial Production (IIP) for May came in at 1.5 percent; export data is also showing weakness. Are you revising your growth forecasts lower?

A: Certainly, if one thinks about it in terms of specific numbers whether the growth will be at 5 percent or 5.5 percent. The risk is on the downside on that specific number. However, in terms of growth outlook, the story is largely unchanged. This is a very significant growth slowdown; even before the current developments and it is quite a prolonged slowdown for India.

Q: The RBI has tried to push up rates by forcing liquidity tightness. Do you see interest rates going up in the system from hereon?

A: The rate issue maybe different on the short-end versus the long-end because the RBI is quite acutely aware of the growth tradeoff of raising rates persistently and significantly at this time. The fact that raising these rates may not even have the intended effect of stabilising the rupee value and may create more negative sentiment on growth itself.

So, that is the tradeoff that RBI is dealing with. The sense one gets from the measures that have been undertaken in the recent weeks is that stabilising the currency rather than significant appreciation is the goal that the RBI wants to signal to the market.

They have been very clear on it and are not going to expand precious reserves to defend a particular level of currency at the same time. They will take certain measures to make sure that the currency doesn’t drop far below what the fundamental economy suggests.

Q: You do not see the RBI raising the repo rate or a possibility of even a cash reserve ratio (CRR) hike in the forthcoming policy?

A: We tend to stay away from predictions of RBI action because we believe two things; one, those are hard to predict and second, they make very little difference to the base line credit assessment that we have of the sovereign.

Our sense is that, there is unlikely to be significant loosening and that is very important from the credit perspective. What it means is, whether the RBI hikes by 25 basis points (bps) or remains on hold or whatever other action the RBI takes, growth is not likely to recover in this quarter or the next.

That is more important from our perspective than the specific action. The RBI’s action in the coming weeks will be very focused on signaling to the market their intent with regard to the currency and what their prioritising in terms of inflation, depreciation and growth. I think that is important to look at now.

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