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Apr 12, 2012, 06.02 PM IST
Moody's Analytics Glenn Levine believes the RBI's hands are tied with respect to rate cuts if inflation at the wholesale level continues to remain around the 7% mark.
“We have got oil prices reigniting and the rupee is weaker, so it’s not clear that the RBI will cut rates,” he said.
Speaking about the February IIP data , Levine says the most worrying aspect was the investment cycle. “Firms have really stopped spending on capital equipment and investment and that’s really starting to slow the whole economy down,” he said.
Below is an edited transcript of his interview. Also watch the accompanying video.
Q: What have you made of what India had to say about the industrial production? Clearly, the January number takes more limelight than what February had to say, but for February itself, do you see some growth or is growth slowing down?
A: That’s absolutely right, the January number quite rightly took center stage because it really was as big revision. I am not too sure exactly what’s going on there, but it was really a reversal from what looked like perhaps the start of the recovery. But instead, as it’s turned out, India is continuing to slow through the opening quarters of 2012, so a big turnaround there.
In terms of the February number, it wasn’t a great number, but it wasn’t a total disaster. Some of the details were okay, things like the food manufacturing and consumer goods manufacturing still looked pretty good.
The big worry for me is around India’s investment cycle. Firms have really stopped spending on capital equipment and investment and that’s really starting to slow the whole economy down. We saw that quite clearly through production of capital machinery of vehicles and other sort of high-tech machines, which are looking very weak right now.
Q: Based on this assessment, do you think the RBI is going to move forward with a rate cut or does it need to in your eyes?
A: My personal view is that they should have cut already, and they probably should have cut couple of months ago. I think that the Indian economy is weaker than people had thought and that tends to be borne out by today’s figures.
As to whether they will or not, I don’t think they will move straight away. I think at this stage they may most likely look for one or two cuts around the middle of the year. It really depends on the inflation numbers though. We have got oil prices reigniting and the rupee is weaker, so it’s not clear that they will. But I will be looking at the wholesale price inflation numbers in particular for the interest rate outlook.
Q: What is your inflation forecast for FY13?
A: For FY13, wholesale price inflation which is what we are talking about here has been running around 7% for the last couple of months. I don’t see it going below 6% and I think that will continue to slow.
The demand side of the economy is weak, but it’s not going to get much lower than 6% and its going to make it tough for the central bank. They have raised interest rates furiously through 2010 and 2011 in an effort to cool inflation, but that hasn’t yet occurred. So it doesn't really leave them much room to reverse course.
Q: How worried are you about the current account deficit, now at 4%? Usually central bankers worry a lot about that number and any cut in interest rates, which fuels consumption, will also fuel imports and have that bearing on the current account deficit. Would that constraint further rate cuts? How many rate cuts would you pencil in?
A: I don’t think that they are going to be too worried about the current account. It’s not too clear to me that there is such a direct link. There are also other things going on like a currency effect for example, which if they cut rates, the rupee would expect to ease a little and that should help with the current account deficit.
I don’t think it’s too much of a worry at the moment. 4% is okay, especially while the economy is still growing at 6-7%. I think if it started to blow out, coupled with the government’s deep deficit, these are the sorts of things that worry investors, particularly foreign investors. Portfolio inflows for example have picked up early on in 2012 if you saw that to start to reverse then that is when things like the current account really start to become an issue.
Q: Looking at the fiscal situation in India, do you think sovereign rating is at any kind of risk?
A: Purely as an economist that watches the Indian economy, I am slightly concerned about the state of the government’s Budget. I think their growth projections for the coming fiscal year are quite optimistic and if they are not met then you would subsequently expect the deficit to remain large.'
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