Expected fiscal sops to hardly impact mkts: Barclays Cap

Sailesh Jha, Director-Asian Economic Research at Barclays Capital, feels the impact of any monetary or fiscal policy action that happens soon, as expected, will be marginal. “Much like the rest of the world, it is going to take some time for this stimulus package to kick into the economy and create some floor on growth and potentially on earnings. As a result, we are going to get continued weakness in the stock market,” he said. “We are probably going to be at 5,000-6,000 Sensex over the next three–six months, dollar/rupee at probably at 52 with the risk of 53 in the Q1 of the next calendar year.”

Here is a verbatim transcript of Sailesh Jha’s exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: Your own expectations of what the Indian government’s fiscal stimulus package might announce and the impact on the market itself?

A: I think there are going to be two types of policy announcements that could come as early as this weekend. The first one would be more on the fiscal side combined with incentives for banks to lend to the real sector. The second will essentially be further loosening of monetary policy.

On part one, the incentives are going to be mainly for the small-scale industries, auto sector, real-estate sector, cement sector and some export-oriented sectors. In terms of monetary policy, my sense is that we are going to get cuts both in the repo and reverse repo rate. I am thinking that on the repo rate, the cuts are going to be 50-100 bps and the reverse repo rate 75-100 bps.

The chances of liquidating-enhancing measures — say a CRR (cash reserve ratio) cut or an SLR (statutory liquidity ratio) cut — are lower although you cannot rule out anything in the Indian context. But because the liquidity seems to be ample at least for the next two weeks, the risk of liquidity-enhancing measures is limited.

The impact of all this is going to be marginal because markets on the monetary policy side very much anticipated this. My forecast is: markets have priced those cuts earlier — more than 100 bps each on the repo and reverse repo rate cuts — and on the fiscal side too. That’s the reason why you are seeing markets are somewhat weak today.

We have had all this talk over the last several days, the market never thought about what’s going to happen and implications are that the government does fiscal stimulus packages. But much like the rest of the world, it’s going to take some time for this stimulus package to kick into the economy and essentially create some floor on growth and potentially on earnings. As a result, we are going to get continued weakness in the stock market. We are probably going to be at 5,000-6,000 Sensex over the next three–six months, dollar/rupee at probably at 52 with the risk of 53 in the Q1 of the next calendar year.

Q: While RBI (Reserve Bank of India) has done a lot on the rate cutting front, you are expecting further rate cuts. We may get a massive stimulus package tomorrow. Do you sense that while the pricing issue is being addressed, it’s credit delivery that’s not happening?

A: Yes, it is actually. It’s similar to around the world when we look at central banks around Asia as well. The policy tools that are at the disposal of any government or central bank are two-fold; one of course policy interest rates, other policy is essentially liquidity-enhancing measures — be it CRR or any type of SLR cuts. The third is more on the fiscal stimulus.

On the second on fiscal stimulus, given that India is fairly constraint in terms of high consolidated public sector deficit, the onus is on the monetary policy side and the government or the central bank has little ability to essentially induce bank to start lending again until perception of risk and outlook on aggregate demand conditions improve.

The government can of course focus on essentially sectors as well, which is what is going to be part of the package. [The move] to bring more sector-specific policies is going to becoming more in vogue in India and probably in the rest of Asia over the next three–six months to unravel the tightness of liquidity and ensure that there is some improvement in demand conditions or output conditions in the next several quarters.

Q: To spill over currently into the real sector seems to be accelerating at an extremely rapid pace especially. Since the month of October, we are getting negative PMI (Purchasing Managers' Index) data, we are getting job losses and we are seeing significant slowdown on all sorts of fronts. When do you see it turning around and when do you see that base being formed in terms of negative news in the real sector?

A: I think we are in the early stages of the bad data point. By the time we hit the first half of next calendar year, the full tsunami would have pretty much hit India. In the data, this FY09-10, we are looking at GDP growth of 5.2% — well below the consensus estimate of 7.2%. In a significant slowdown from this fiscal year, where we are looking at around 7% — in line with consensus — the weakness is that credit is just frozen now. All the credit numbers right now are being contaminated — they are fairly still robust in the data from essentially past passage of credit, just the disbursals based on past passage of loans.

The new loans are just not being passed at all. I mean big industrial companies, public-listed companies [were finding it] very difficult to access credit whether it’s credit for capital or working capital or essentially letters of credit. That was inducing this big slowdown now all of a sudden, [we have this] a gap-down in terms of industrial activity. As a result, what you are seeing is that employment conditions are worsening and are spreading to the services sector, to the hardcore industrial sectors in India.