Credit Suisse view: India IIP numbers are 'bizarrely' weak

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The important economy number that comes in tomorrow is the industrial output numbers (IIP) for January. They are not expected to be too good. The poll which ran on CNBC-TV18 threw up a number of 2.7% and that's largely because starting from December itself, India has been struggling with a very high base which itself is bound to keep numbers a little lower.

Robert Prior-Wandesforde, Head of India & South East Asia Economics at Credit Suisse, in an interview on CNBC-TV18, gave us his expert opinion on the numbers that he expects.

Within the next three-six months, there is nothing unusual or untoward which takes place, he sees an average growth between 5-6%. For January, however, he pegs the IIP number at 3%, slightly higher than CNBC-TV18s estimate.

Below is a verbatim transcript of his interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy. For the complete details watch the accompanying videos.
 
Q: What are you expecting from January as well for the whole quarter?

A: We are fractionally above your consensus number which is 3%. For the quarter as a whole we are going to see an average year on year growth, hopefully, slightly higher than that. One thing that strikes us and I am sure, it strikes a lot of people is how bizarrely weak these numbers are.

It's almost as weak as they were at the bottom of the global credit crisis in early 2009, when exports were falling off the edge of a cliff and the manufacturing PMI was well below 15. Now exports are apparently growing strongly and the manufacturing PMI is very robust as well. There is going to be a significant question mark as to the quality of the data and exactly what is going on. I suspect things are somewhat stronger than these numbers are indicating.

Q: Give us a timeline as to how long we would have to work with these low single digit numbers? When do you think we could get back to those averages of about 6-7%?

A: I would assume it happens within three-six months. The kind of 5-6% number is a fair guess for what we will see in the fiscal year as a whole. That's roughly inline with the long-term trend. It's consistent with an export performance which is at least. Unless there is something very badly wrong with the numbers then I would be surprised if we didn't get to that.

Q: The last GDP growth number you said was 7.7% for FY12. What are you doing with the numbers now? Are you marking them even looking lower with what crude is doing?

A: We certainly tempted to. It's fair to say that the risks to that 7.7% number are on the downside. It seems to me that this rise in the oil prices is another at least more negative to economy. I don't think its reached levels which are devastating for the economy by any means.

To us the much more important negative driver for growth over the coming year or so is the lagged effects of all these interest rate rises. Not just the fact that the policy rate has been rising so aggressively but more importantly the domestic liquidity conditions are so tight.

For example, three month inter-bank rates are up something about 500 bps and that in the context of the economy which is much more leveraged that it was, outstanding bank loans are about more than twice the levels they were 10-12 years ago. It will have a much bigger impact than most people and perhaps even the RBI seems to expect as well.

Q: Would you be reworking your numbers or would you still stay at 7.7%?

A: I suspect we might be lowering the risk on the downside. We will wait and see for a little bit longer how oil prices develop. The key point is that 7.7% at this stage, seems to us is the maximum number that we can anticipate.

Q: The rupee has been moving, pretty rock-steady in the face of FII pull out of cash as well as higher crude prices. How do you explain this stability and what is the trajectory for the dollar-rupee June 30 or even for that matter December 31 this year?

A: It is still underperforming most other Asian currencies. If we look at things like the Indonesian rupiah or the ringgit or the peso, most of them have been on a strengthening trend over recent times whereas the rupee has been pretty stable. I think that is on account of India's current account deficit, the relative difficulty it has in financing that.

I suspect going forward that trend will continue. Particularly, if we are right on the growth view, the market will be surprised on the downside. That will be reflected in lower earnings numbers as well than what most people expect. That in turn means that perhaps we haven't seen the end of these much lower FII flows into the country.

The other of course very important longer-term issue is the most sluggish FDI numbers that have been pretty poor in 2010 and have started in 2011 or even softer. The bottomline is that the rupee is at best flat over the next six-twelve months.

Q At worst would you look at Rs 45.50-46?

A: I would say it could easily get to Rs 46 maybe even higher than that.

Q The investor confidence in India has been hit because of all the macro issues. What are you sensing in terms of outflows and where are you on the EMs versus DMs debate?

A: Certainly, for another few months, the temptation as a global investor to park more of your money in the US in particular, relative to Asia is very tempting. After all, the US is seeing pretty robust growth now in the context of a lot of spare capacity which means core inflation is going to remain low, which in turn means the Fed is not going to be doing anything in terms of interest rates for a long-time. That is a pretty positive macro backdrop.

For Asia, however, at least for the next few months and this is particularly true of India, you have got all this inflation uncertainty there, you have got interest rates going up strongly in some cases and that in turn the combination of those things will mean that growth is damaged.

From an equity perspective, in particular, that is not a favourable combination. Within Asia, India is our equity strategists' least favourite market.

Q: What are you expecting RBI to do on March 17 and thereafter in subsequent policies in 2011?

A: We still think they will raise again at 25 bps on both the repo and reverse repo rate at the March meeting. They will follow it up perhaps with a couple of more moves. By July-August, we would expect the evidence of economic slowdown to be very apparent and for them to be stopping raising rates.

This is not a central forecast, but I wouldn't rule out the RBI cutting interest rates before the end of the fiscal year 2011-2012 on the basis that growth will disappoint and that will put the RBI in a quite a lot of pressure to turn policy conditions around a bit.

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