Drought may lead to 5.8% GDP; expect lending rate cut: BofA

While analysts expected the June Index of Industrial Production (IIP) data, to be around 1%, it was well below expectations and was reported to be -1.8%. Indranil Sengupta, Chief Economist India at BofA ML too believed the number was going to be 1%, down from last month's 2.4%.

According to him, IIP is underestimating growth by 20 to 40 bps and he is expecting the GDP number to be in the range of 5.5-6%, added Sengupta.

Further, Sengupta expects lending rates to be cut in the event of a drought. "This is the first time you are going to see a drought with high lending rates. In 2002 you saw the RBI cutting rates. In 2009 we had very low lending rates. I assume that you'll probably see some lending rate cuts happening," he added.

Besides, the weak monsoon may have an adverse impact on the rabi crop and therefore, Bank of America is not factoring in any growth in agriculture during FY13.

Here is the edited transcript of the interview on CNBC-TV18.

Q: What is the number you are working with?

A: It is 1%, down from 2.4% last month.

Q: What are all these IIP numbers adding up to for the GDP number which is going to come at the end of the month?

A: I think we will probably see a GDP number in the range of 5.5-6% assuming that you don't get another big upward revision like last time. Clearly, the growth numbers will be weaker than last time. Without revisions last time you would have had about 6%.

That said, I think the industrial production numbers themselves are underestimating growth. When you look at industrial loan growing at 20%, when you look at the PMI, it is very difficult to reconcile that with 0-1% IIP. My sense is that maybe IIP is underestimating growth by 20-40 Bps.

So maybe we didn't slow down to 6.5% last time, maybe we slowed down to 7% and we slowed down nevertheless. But, clearly the IIP numbers are underestimating growth.

Q: We have seen a slew of GDP downgrades in the last couple of days from many of your peer brokerages, from rating agencies like Moody's. Where is your GDP target number standing at now?

A: We are at 5.8% with the drought.

Q: You don't see any downside risk to that?

A: I think a lot depends on where the lending rates go. This is the first time you are going to see a drought with high lending rates. In 2002 you saw the RBI cutting rates. In 2009 we had very low lending rates.

I assume that you'll probably see some lending rate cuts happening. We have already seen SBI cutting rates because of the measures that the RBI has taken to improve liquidity. But that's a very important issue.

Secondly it is important to see how much rains we get around September because right now the Indus which will water the wheat crop is running way below normal levels. Only if you get good rain that you will get a normal rabi crop. As of now, we have gone by the MET's (Meteorological Department) projection that you get a normal rain in the next two months. Otherwise, there will be a downward risk as well for the rabi crop.

Q: This 5.8% is adding up what kind of numbers on agriculture, manufacturing and services?

A: Agriculture is close to 0%. Manufacturing, if I recall rightly, it is close to 4-5% and it is building in a bit of a base effect bounce towards the end of the year. I guess services would be around 8% but, I am not that clear on the numbers.