Expect RBI to cut 75bps in 6-8 months: Deutsche Bank

A weak economy has bothered the country for quite some time now and with the gross domestic product (GDP) for Q3 standing at 4.5 percent, expectations of muted growth are doing the rounds. Michael Spencer, Chief Economist at Deutsche Bank told CNBC-TV18 that the economy seems to have bottomed out in Q3 and he expects a shallow recovery mainly supported by global cues. However, he is optimistic about the Indian economy and believes it will get stronger over the next couple of years.

Spencer also sees a 75 basis points rate cut from the Reserve Bank of India in the next 6 to 8 months. He is also hopeful of better GDP growth in FY14 when compared to FY13.
Besides, Spencer added that the outlook for Europe has not improved in 2013. He further said that concerns over the Chinese property market not unexpected and he thinks markets over-reacted to news of property curbs in China. Going forward, he also expects the Yen to be at 100 per dollar in the near-term. Here is the edited transcript of the interview on CNBC-TV18. Q: Let me start of first by asking you about what you feel on the Indian context because that is where the greatest shock has come through with the sub-5 percent growth and the 4.5 percent handle that we reported. How long do you think this process of recovery is going to take and are you as optimistic that growth is beginning to recover or going to recover?
A: Certainly, the leading indicators are or all indications that the economy probably bottomed out towards the beginning of the last quarter of last year. It is going to be a fairly shallow recovery but, supported perhaps initially by global recovery. I do think Indian growth will get stronger over the next year or two.
In terms of recovery, we have opened up a fairly sizeable output gap in India over the last couple of years. So, it will take another couple of years before people feel that the economy is strong. Therefore, if you are looking for an improving growth, I think you will see that over the next couple of months. Q: Have you had cause though to low your own estimates of this year and going into the next year because of what we have reported in the past two quarters?
A: No, we have not. Fourth quarter was marginally weaker than we were expecting but, it was only marginal and to be honest, we see relatively positive developments coming from abroad. The US picture, we think is much more positive than most people think.
China is doing well. The Chinese economy bottomed out a year ago and even in Europe where Q4 was disappointing, the outlook for 2013 has not materially changed. So, at this point, there is no need to change the outlook for India. I see many countries where there is a bit of an upside risk forecasting, there is a downside risk. Hence, we have a relatively balanced outlook at this point. Q: Have you changed expectations in terms of what you think monetary policy may do over the course of this year having reported 4.5 percent growth?
A: No, we have not. We still see the possibility that Reserve Bank of India (RBI) may cut rates by 75 basis points over the next six to nine months and almost certainly a rate cut later this month. It becomes more conditional thereafter on continued stable inflation at least, if not slightly moderated inflation.
But, the view is the economy will show a little bit more strength by midyear and thereafter. The RBI wants to support growth but, they can only do that if the inflation environment is conducive and there is some much uncertainty around inflation. We cannot be more confident more than three months out.
However, at this point it does look like we have got a few more rate cuts to come and that view has been with us for a couple of months now. So, that hasn't changed in light of the Q4 numbers.
_PAGEBREAK_ Q: There has been consternation in the past couple of days with the newsflow that is coming through from China. There are property curbs that have been put in place. That space contributes 10 percent to China's gross domestic product (GDP). Are you getting concerned about China's growth and collateral damage to the Asian region if there is slippage?
A: Residential construction does not contribute 10 percent to the Chinese GDP. To be honest, what we have seen over the last few days is not unexpected.
The essential problem that the Chinese policy makers have over the property market is that the cost of borrowing is still too low. Until they address that, I think they will make significant progress on that front over the next couple of months. But, until the cost of borrowing is materially higher, they have to prevent incipient property bubbles by using what we call macro-prudential rules such as we saw on Friday night. Lower loan to value ratios, higher capital requirements, higher transaction taxes and part of the announcement on Friday was supposedly on introduction of taxes on property that are going to be very difficult for them to collect, very difficult for them to implement even over the next 5 to 10 years.
So, what you should interpret of Friday’s announcement is as a reminder from the central government to local governments that for the last couple of years, we have had in place a relatively tight macroprudential environment to try to restrict property investment and we will not relax those controls this year. If anything, they need to get a little bit tighter as the economy recovers and naturally, people will get more positive on investing in real estate. The government is reminding local governments to be vigilant not to allow property price inflation to pick up materially again.
To me, the market’s reaction yesterday is a significant overreaction. As we often see with policy announcements in China, there is so much opacity around the policymaking process that the market does tend to overreact and then rethink over the next few days. Q: If you were to step back and do qualitative analysis on the kind of growth that China is eking out versus what India is doing, would you say that China may come out on top because that has been the fear this year that China will get more attention than India, both in terms of growth and returns?
A: I think it is natural. The Chinese economy has been growing a lot faster than India. I think both economies will see higher growth this year than last year and from that perspective, I do not think China does any better relative to last year than India. I think in 2014, both the economies will again grow faster.
From that perspective, the rate of growth in China will be considerably higher than the rate of growth in India. Both economies will see progressive improvement over the next two years at least. Q: At this point when you look out a couple of months, what looks like the greatest risk to global growth to your mind? Is it something coming through from the Asian region, is it the US which has dealt with one sequester alright or is it Europe that you think may blow up, either for political reasons or otherwise?
A: There are all kinds of risks out there. I think you hit on two; one is US where we have every couple of months the manufactured political crises and that unfortunately seems to be the way the political system in the US is like. It needs to generate these crises in order to function in the same way Europe does. It has only seen policy improvement when their backs are up against the wall.
Sadly, that seems to be the way the US political system evolves as well. So, I do worry that come May, when Congress is supposed to have passed a budget, I worry that we will have another nervousness around whether policy will hold together, whether they will have government shutdown and that sort of a thing.
In Europe, there is still so much political uncertainty and this is not new, this is not Italy post election, this is the broader European perspective where you are only getting comments on improvement and policy when there is a crises. I think we have to assume that every few months in both the US and Europe, there will be crises.
What is important for investors to understand as you look beneath the headlines is, in the US we have a very positive private sector growth dynamic while in Europe, we are comfortable with the idea that around mid-year, euro land will start to grow again. We think the economic performance of these countries will be considerably better than the second half of this year than it has been over the last six months and investors need to try to look through the political noise because that noise is deliberately generated as a way to implement policy.
If you focus on the reality, the economic numbers, the performance of companies, the news will get significantly better over the next six to nine months. Q: Give us one final word on the currency set up because a lot of people are pointing to the currency market as a sign of the flux that could be coming both in terms of what has happened with the euro-dollar, the strengthening of the dollar index and the continued depreciation of the yen. Would you say that would be the market to watch over the next few months and that is where the dynamics are changing?
A: Certainly, the weak dollar environment that goes back a decade is probably over. The Japanese want a weaker yen and for the next couple of months we should assume the yen does continue to depreciate, I think 100 yen to dollar is a very reasonable forecast for May this year. Thereafter, that story pieces out but it is hard to see yen appreciating significantly. I think the US is ahead of Euro in beginning to think about exiting from easy monetary policy.
So the dollar is likely to do well against the euro and the yen. In that sense, a broad strong dollar environment is likely to be the case for the next month, quarters or maybe years. There is not necessarily any Asian contact, we still expect most, if not all Asian currencies maybe with one exception in Indonesia, will end the year stronger than they are today and probably end 2014 even stronger. We still favour Asian currencies versus the US dollar. We favour the US dollar versus the yen and the euro.