Interest rates across the world were on hold for most part of 2006. Surjit Bhalla of Principal Oxus Investments & Peter Morgan Of HSBC give their view on how the interest rate scenario is likely to pan out this year.
Interest rates across the world were on hold for most part of 2006.
Surjit Bhalla ofPrincipal Oxus Investments & Peter Morgan Of HSBC give their view on how the interest rate scenario is likely to pan out this year.
Surjit Bhalla says thatrates are at a peak globally but a rate cut from US Fed can be expected in the later part of the year. The Indian GDP may slowdown to a shade below 8% this year. He also adds that one more hike by the RBI can also be expected.
Peter Morgan Of HSBC says that a slowdown can be expected in FY07 because of the housing market slump. The Fed is expected to cut rates by 4% but it won't have any major impact.
Excerpts from CNBC-TV18's exclusive interview with Surjit Bhalla and Peter Morgan:
Q: Hard landing, soft landing or the economy just going as usual in the US. What do you foresee and what kind of impact do you see that having on flows into India?
Bhalla: I don't see a hard landing; by influence I see a soft landing. That means that basically growth in the US would be around 1.5-3% and inflation subdued. What it means for India poses a big question.
I think it is likely that we will be impacted by the slow down. So while there will be an impact, it won't be as large as before. So as far as the Indian GDP growth is concerned, I think 8% is likely.
Q: You are forecasting a slowdown in the US for calendar year '07. Will that have an impact on the global economy? Will we see the economy which has been growing at about 4% for the last 4 years fall below that and what kind of impact will that have on emerging markets?
Morgan: We think that the growth will come down but still be just around 4%. So it will have some impact but not too negative. I think that the growth dynamic in emerging economies generally is still quite strong and that will help pull them through this situation. There will still be lot of support from domestic investment. So even though we do forecast somewhat slower growth in Asia as a whole, there is still a pretty reasonable growth rate.
Q: One of the concerns being expressed by a number of people we have been speaking to - foreigners investing in India - is of the likelihood of hardening of interest rates in India; that is a bit of a concern there. Do you see that happening at all?
Bhalla: The last time I said it I turned out to be wrong because we seem to be going on our own trajectory. But I find it very difficult to see interest rates hardening; I am not in that camp. I think interest rates will soften and inflation rates will come down.
Q: How do you view the issue of current account deficits at this point in time and its impact on inflows into India?
Bhalla: Current account deficits is working quite well. I think something around 1-1.5%, and it might even be lower because domestic savings and domestic investments have also been rising quite rapidly. So I think the current account deficit is a reasonably rosy picture on the horizon. I don't see really any problems on that front.
Q: You have also talked about a growth in savings. We would want to know your assessment on where do you see or how much savings do you see being channelised to real investment - into productive investment and how much really been retained for consumption?
Bhalla: If you look at it over the last couple of years, the current account deficit has been broadly the same - from about plus 0.5 to minus 1. So that means that most of the savings has gone into productive investment. Now, after all, some kinds of consumption also come under savings especially in durables, which affects the calculation a little bit. But I think the growth of the economy is very strong.
Therefore, the savings growth will be strong because there is a relationship between savings growth and income growth, especially when income growth is somewhat unexpected and we are in the range where nobody really expected this kind of an income growth. After all, just a year ago we were talking about reverting back to 6% per annum.
So I think bulk of the increase in income growth has channeled into savings, investments and productive investments. Housing is considered to be unproductive investment or speculation and some people think that even stock market investment is speculation. I think as an economist really that is for psychology people and other people to talk about unproductive investment. Most investment in my books is positive investment.
Q: Come in on your view on India for 2007 - what is it that you are really looking at in terms of sectoral performance?
Peter: We do look for some slowdown in growth, probably just to a shade below 8%. We think that India will be affected by the global slowdown but our work suggests that India is probably one of the least affected Asian countries and so the impacts are to be pretty mild.
Even with 8% growth we are still concerned about bottlenecks, inflationary pressure and therefore actually look for one more rate hike this year. We think that even if oil prices are stabilising somewhere, inflationary pressures are still significant and therefore would warrant some further tightening of policy.
Overall growth will come primarily from the services sector as it is still the main driver of the Indian economy in addition to a good contribution from the exports and manufacturing segment.
Surjit Bhalla of
