See FY14 GDP at 4.8% if liquidity squeeze persists: BofA ML

The worsening economic condition will result in a growth of sub 5 percent if monetary tightening by the Reserve Bank of India (RBI) persists, says Indranil Sengupta, Chief Economist India, BofA ML.

He sees FY14 GDP growth at 4.8 percent and believes that due to squeeze in liquidity high lending rates will eat away benefits of monsoon. Therefore, GDP growth will depend a lot upon when the monetary policy is dismantled.
"If RBI and the government will take measures to expand capital flows for example NRI bonds, market will get reassurance and rupee will appreciate. Taking chances with growth and inflation at this stage may not really help the rupee," he says in an interview to CNBC-TV18. Below is the verbatim transcript of Indranil Sengupta's interview on CNBC-TV18 Q: For me the big positive yesterday and after a long gap has been that financial household investments and financial savings have gone up from 7.5 percent to 7.7 percent. Gold investments fell from 2.4 percent of gross domestic product (GDP) to 2 percent. Should we think that both savings rate and savings in financial instruments has now troughed out and will increase?
A: I think they will. A lot of fall in financial savings is due to the fact that deposit growth plummeted because of RBI tightening and you take 58 percent of that deposit growth and plug that into house hold saving. So assuming that the RBI begins to relax management tightening as we go ahead, you will see household deposit numbers look better and financial savings will actually look better than it did in the past two years. Q: Do you think finally the rupee depreciation will play out in the form of positive trade deficit declines and therefore we are at the end of the fall for the rupee?
A: There are two ways of looking at it. One, the fundamental value of the rupee according to BofA ML is 51.1/USD so the rupee is highly undervalued. At the same time given that the import cover is down to seven months, eventually the RBI and the government will have to do a non-residential Indian (NRI) bond or a sovereign bond to stabilise rupee expectations.
Therefore, the path rupee whether it peaks out here and gets back towards Rs 60 or not will depend on what kind of official action is seen in the next few days to reassure investors. We have already seen that in the bond space, one action and bonds go back.
_PAGEBREAK_ Q: On Thursday, the numbers for bond buying has been substantial. After a long gap there was USD 270 million of bond purchases on August 21, reported on August 22. What is your sense of moves to cut the current account deficit (CAD) itself? Will a seminal jump in diesel prices reassure foreign investors and bring back confidence in the rupee?
A: The other angle will be inflation and inability to cut rates. So measures to bring down the CAD are welcome but one has to see the knock on effects on other sectors at a time when growth is limited.
If the RBI and the government were to show more ways of expanding capital flows for example NRI or sovereign bonds, the market will get reassurance and the rupee will appreciate. Taking chances with growth and inflation at this stage may not really help the rupee. Q: What about the inflation trajectory itself? We saw a jump in previous month and the current month in the wholesale price index (WPI). Do you think we will see uglier inflation numbers and what does this mean for RBI policy? Have we for sure wiped out any rate cut hopes?
A: This month’s inflation jump was largely led by the supply disruptions of vegetables because of floods so that should unwind as we go forward. Inflation will go back up to 6 percent because you have tariff hikes, you have diesel price hikes, you had a coal price hike and clearly now the rupee will exert pressure.
If the rupee goes and settles at 65, inflation can very well go back to 6.5 percent. The RBI should be able to cut about 50 bps somewhere towards the end of the year as the rupee settles but a lot depends on when will they dismantle this 10 quarter tightening. Q: Over the past 24 hours we have seen stability in the rupee. The way in which every day takes away Rs 1.5 from increasing the dollar value by Rs 1.5, is this kind of stability over the last 24 hours an indication that even markets think the currency has fallen enough?
A: Our own fair value is 51.1 to the dollar but at the same time you need more action from the RBI to reassure markets. If that action comes the rupee will react the way bonds have reacted to this withdrawal of this open market operation (OMO) sales and introduction of OMO purchases. Q: There will be some positives from global growth, after all 25 percent of our GDP is coming from exports and we have rupee depreciation to help exports a bit. Do you think there could be an export led stabilisation of growth and we may have troughed out already, can we get a 5 percent number even for the current quarter?
A: We are looking at 4.7 percent for the June quarter. In September and December you have the base effect of floods but if the monetary tightening persists in the busy season, we would look at 4.8 percent growth for FY14 because then high lending rates will eat away the benefits of the monsoon. So a lot depends on whether you are able to dismantle this monetary tightening before the advance tax flows or at least before Diwali when the busy season kicks in.