Rajan may rollback liquidity moves by Q4: Barclays

Siddhartha Sanyal, Chief India Economist at Barclays Capital, expects new RBI governor Raghuram Rajan to rollback the recent tightening measures by fourth quarter. He feels the first cut in repo rate will happen sometime in December 2013.

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"Growth inflation dynamics is clearly hinting at it - the domestic factors are clearly hinting at more monetary easing apart from other growth alleviating measures," Sanyal says.
He told CNBC-TV18 that it'll be difficult to impose import controls because the import basket primarily consists of significant items like oil, gold, electronics, coal and iron and steel.
Meanwhile, he sees two ways of bringing in dollars - NRI bonds can pull around USD 15-20 billion into the system. Secondly, announcing some small measures, such as easing ECB route and FCNR(B) deposit route, allowing some quasi-government bodies to go abroad and borrow money will also help to attract foreign funds.
Barclays Capital has cut down its GDP expectation from around 6 percent earlier to 5.3 percent now. Below is the verbatim transcript of Siddhartha Sanyal’s interview on CNBC-TV18 Q: You wrote a small piece on Raghuram Rajan as the next governor and you said that you do not see any major change in policy, Rajan has even in the last interview said that he does see room for rate cuts and that growth has to be protected on all counts, are you expecting therefore that perhaps there could be a rollback of these steps or at least some scope for rate cuts before the fiscal year is out?
A: Yes very much. These particular set of measures will be temporary in nature. We are thinking this set of measures will be rolled back not necessarily in the next few weeks or maybe in a month, but by Q4 they should be rolled back. We are factoring in our first rate cut in the repo rate sometime in December 2013 because the growth inflation dynamics is clearly hinting at - the domestic factors are clearly hinting at more monetary easing apart from other growth alleviating measures. Q: You have also come out with a report where you have said that if the government introduces any kind of import controls to curb the current account deficit (CAD) it is not going to be of too much help, why do you say that?
A: If you see the import basket - it is pretty well-known that oil is a big chunk, gold is a big chunk, these days electronics are a big chunk, coal, iron and steel these things are very significant. So if we want to get big results, you have to address some of these areas.
On the gold side, they have done quite a lot. Now they might go a little slow whether they would want to impose some restriction there.
Electronics is one particular area where there is a lot of chatter and this is generally perceived to be some kind of non-necessary imports. So that way the possibility of something coming in the area of electronics cannot be ruled out.
However, the problem here is some of the bilateral, multilateral treaties - something like information technology agreement - which is a multilateral agreement, and India is significant to that. It is not very easy to impose large-scale customs duty or tariff hike in these particular areas.
So what you can see instead of any large-scale hike in customs duty, you might see specific cases where you impose countervailing duties or you try to put surcharge on bank lending for imports, these kind of measures you can see but very general hike in customs duty is relatively difficult in most segments.
_PAGEBREAK_ Q: You do not expect that the country will be able to save much by way of raising imports in any heavy electronic goods, have you made any calculation as to how much that might yield?
A: It is very difficult to get a clear number but by and large in terms of billion dollars, you would expect a number in low single digits not a very high number. Q: Are you expecting anything by way of non-resident Indian (NRI) bond announcements or maybe tinkering with the foreign currency non-resident (bank) (FCNR(B)) rates offering banks some kind of sops on that, not having to keep cash reserve ratio (CRR) on FCNR(B) deposits, anything on those lines? There is some expectation in the forex market that over the weekend, something will come, what could that be at all?
A: I do not know what can come over the weekend but generally, some of these measures are long overdue.
There can be two different approaches in this case. One is you go and issue an NRI bond which can give you very significant chunk of money, something in the range of even USD 15-20 billion in our understanding and that can give you the much needed breathing space at this moment. You keep on adding up a few other measures.
The other approach is you save that particular heavy tool for some other time and keep on announcing some of the small measures, you ease the ECB route a bit, you put a bit of import control here and there, you ease the FCNR(B) deposit route and all of them put together you allow or encourage some of the quasi-government bodies to go abroad and borrow money. So all these things can put together bring in something in the high single digit or something like a USD 10 billion.
One of the two approaches very clearly is long overdue. At this juncture my sense is that not any further monetary tightening or heavy dose of liquidity absorption will help INR. What will help is to generate quick near-term flows. That is most important. Q: Coming to the first point that you said, one of the options with the government is an NRI bond which can get in money close to about USD 15-20 billion, if that perhaps is announced then how much can it yank up the rupee, we are currently hovering around 61/USD, how much of an impact can it have on the rupee?
A: There should be a big knee-jerk pullback in that kind of a situation. It is very difficult to speculate in terms of numbers, but it can be a significant pullback in almost no time. Q: Can it get us to like 58/USD?
A: You cannot rule it out. Q: You were telling me your CAD forecast, 3.8 percent you said?
A: 3.9 percent is our existing forecast which is around USD 80 billion for the full year, but my sense is that the bias is this number can go down further and we can see some positive surprise on this particular front. So the worries are not on the current account front. Current account front from around USD 90-88 billion last year will be a lot better. The issue is all related to funding. So the focus of policy should be to generate near-term funding. Q: Since you expect things could get rolled back only in Q4, are you watering down your credit growth expectation and GDP expectation for FY14, where do they stand now?
A: Yes, that is a clear collateral damage. We have recently cut down our GDP expectation from around 6 percent earlier to 5.3 percent now. We think that the impact will be the most in case of the current quarter as well as in case of the next quarter. Banks will possibly be even more cautious in terms of disbursing credit because the fears of NPA etc will also be even higher. Q: Also going by what you said, the 10-year should be above 8 percent for all of calendar 2013, should we expect it to go below that level in Q4?
A: It depends a lot on the direction of rupee or expectation around the rupee. If there is something like a significant chunk of flows from NRI bonds or some of the other tools and through that if the market derives the confidence that INR is not going to weaken further in the next three-four months then possibly the current yield will start looking all of a sudden a lot more attractive. In that case you cannot rule out some kind of a pullback in bond yields as well. But it depends a lot not on RBI policy, more tightening etc, but on whether we can arrest the fall of the rupee even on a near-term basis on a three-four-six months basis.