Trade deficit can settle much lower to $17bn: Deutsche Bank

Trade deficit in April came much higher than market expectation at USD 17.8 billion, however, Taimur Baig, Chief Economist, India Global Markets Research, Deutsche Bank believes that it is an absolute one off.

According to him trade deficit would settle much lower than USD 17 billion. In fact, he is sure that it will be much lower when May and subsequent monthly numbers will be out. However, he is not bullish on the growth side regardless of the IIP numbers because there isn’t any real indication of growth picking up. "Everything that we see in the economy on the real side is weak," he added. Also read: A short-lived reprieve in trade deficit or has something changed? Below is the verbatim transcript of his interview to CNBC-TV18 Q: Would you dismiss yesterday’s trade deficit number as a one off or is that cause for worry for Indian macro watchers? A: No. I think it is an absolute one off. We should not worry about it and we should expect a very sharp contraction in input numbers when the May data comes out. I simply can see how given the way income, growth everything else is panning out in India and how that can be settle with USD 17-USD 18 billion trade deficit on a month to month basis. Trade deficit should be much lower, it will be much lower when we get the May and subsequent monthly numbers. Q: This one has actually now become tougher call then even the Index of Industrial Production (IIP) figures what kind of trend would you expect to see in terms of recovery as you said? A: It starts with the fact that growth is weak and from there it follows that current account should be under less pressure, trade deficit should be smaller, inflation should be lower and rates should be lower. So we are not bullish on the growth side and regardless of the IIP numbers whether it is 1 percent or 2.5 percent. The fact of the matter is it is very low. There aren’t any major leading indicators showing a big pick up so. Everything that we see in the economy on the real side is weak and that is consistent with lower trade deficit, lower interest rates and lower inflation. Q: The figure did weigh on an already weak currency though, admittedly most Asian currencies are on the weaker trend – how are you reading this weakness in the rupee and where do you think it could be headed? A: Last month when we did not have this gold data we were surprised by the inability of the rupee to go break below 54, heading towards 53 given how strong flows were. The rupee was and remains under pressure because we have this one off pick up in gold imports and the dollar supply demand situation was not exactly in normal territory. However, going forward we see this one off waning. Therefore, from that if follows that the rupee should not be under greater pressure any further. We reiterate our view that rupee should be heading towards 53 not higher above 55 in the next three to six months horizon. Q: We keep coming back to the issue of growth – this morning S&P says India will grow at 6 percent this year – are you less optimistic than that? A: If you are talking about FY13-FY14, we are also in the same range. We are looking at 6 to 6.5 percent, but again we are being optimistic based on certain assumptions about how the macro economy would evolve. We expect exports to pick up, interest rates to be much lower and we expect the government to deliver on a series of steps in terms of boosting investor sentiment whether it is spending or more regulatory reform. If all of those things pan out India can grow at 6-6.5 percent but it is not a given. It is contingent upon on all of those eventualities. Q: The consumer price index (CPI) number looked quite benign yesterday and today we will probably be presented with a fairly benign wholesale price index (WPI) number. The bond markets are adjusted for that with yields coming quite low but that is not just sitting with the kind of tone that we heard from the Reserve Bank of India a few days back? A: Indeed. The Reserve Bank tone remains rather hawkish. They have made it rather clear not much room for ambiguity there that they do not see much more room for policy easing given the way the risk on current account and inflation are. However, our view is that the RBI has left the small window open which is, it would be guided by data and as we see sharply lower than expected inflation pan out month after month, the central bank will be complied to cut rates. It also will not get anything encouraging on the growth front. The weak growth on one hand and lower inflation on the other hand we don’t see how the RBI can maintain the hawkish tone and remain on the sideline. It will be complied to cut in the coming months. Q: It has actually been a long line of cuts that we have seen through the course of the last few months, but the flow through the system still remains elusive, this time around most banks came out and said look it is not enough we can’t do anything with our rates because of the RBI rate cut – when does that match happen you think? A: The RBI’s point has been consistently that any bank that has genuine need of liquidity it can tap a series of windows and facilities and get the liquidity. This idea for banks that liquidity is tight, is something that the RBI in my view is not very sympathetic towards. On the other hand, the banks keep on arguing that the liquidity use to be far easier back in 2009-2010. That sort of liquidity one needs before one is comfortable enough to pass it on to consumers or borrowers, specially when one is worried about bad loan issues. The banks need greater liquidity injection, they need greater assurance of stable or lower rates going forward and only then transmission will take place. In this context, the RBI still has been perusing the policy of keeping the effective rate towards the top end of the corridor. Frankly, I really don’t understand the rational behind that given that policy direction is towards easing and you think that, for that to take place you would want the effective rate to be at the bottom end of the corridor. However, so far we have not seen any inclination from the RBI’s part to move in that direction.