Infusing more funds in PSBs won't aid FY14 growth: BofA ML

It's too late to revive growth in FY14, Finance Ministry’s decision infuse more funds in public sector banks (PSBs) which aims to reduce rates on some consumer durable loans may not be of much help, says Indranil Sengupta, Chief India Economist of BofA ML. He sees FY14 growth around 4.6 percent.

As we head into the festive season, the government has decided to infuse more than the budgeted Rs 14,000 crore into PSBs to help stimulate demand. “Lending rate cuts hold the key to growth. There will be political uncertainty. Growth will bottom out only in September quarter as things stand,” he told CNBC-TV18 in an interview. Meanwhile, he expects the central bank to announce one more repo rate hike to contain inflation. Also, he sees RBI continuing rollback of July steps and lowering marginal standing facility (MSF). In September, RBI raised repo rate by 25 bps to 7.5 percent in its mid-quarter policy review. The MSF rate was reduced by 75 basis points from 10.25 percent to 9.5 percent. Below is the edited transcript of Indranil Sengupta’s interview with CNBC-TV18 Q: This is once again becoming classical contradiction between government and the Reserve Bank of India (RBI), we have got a very clear indication from the RBI governor that he will go after inflation and that he is not done with rate hikes. At a time like this, this kind of a move confuses, doesn’t it, does it have any hope to succeed at all, and will it make any difference to growth? A: We have often said that lending rate cuts hold the key to growth. Unfortunately, we are getting into the busy season with very high lending rates. It is too late to revive growth for this year, will we had 4.6 percent growth this year and even when lending rates come down in the June quarter, that will be the time of elections. There will be political uncertainty. Growth will bottom out only in September quarter as things stand. Q: What is that September quarter number? A: We are looking at 5.5 percent growth next year. I don’t precisely remember the September quarter, but we remain around 4.5 percent levels till then. Q: What about the upcoming policies, at the end of this month, what is the expectation? You think that rate hike programme will continue? A: We do expect the RBI to continue to rollback the July measures and bring down the marginal standing facility (MSF) rate. There should be one repo rate hike more to contain inflation expectations. The real effective repo rate is coming down. Last time when the RBI cut MSF rate by 75 bps and hiked repo rate by 25 bps, you saw the effective blended repo rate come down by 25 bps. One important thing to note is that the effective lending rate from the RBI is going to come down over the next few months even if the bottom goes up.