Q1 GDP to remain flat; 25 bps rate cut likely in June: HSBC

India's manufacturing growth nearly stalled in May as factory output shrank for the first time in over four years and Leif Eskesen, an economist with HSBC feels the domestic weakness is likely to continue. The survey done by HSBC suggests that manufacturers are still struggling for power which is holding them from working at full capacity.

Eskesen expects first quarter gross domestic product (GDP) of FY14 to be in the range of 4.8-5 percent, similar to Q4 of FY13. He says FY14 growth can touch 6 percent on the back of structural reforms and swift project clearances.  He, however, warns that the balance of risk at the moment is tilted towards the downside.

He feels Reserve bank of India (RBI) may cut policy rates by 25 basis points in its June monetary policy, though the scope for further monetary easing is somewhat limited.

Below is the verbatim transcript of Leif Eskesen's interview on CNBC-TV8

Q: What would your reaction be to the India's May PMI numbers?

A: The domestic weakness continues. This is because if you look at what drove this effectively, if you look at export orders, they were quite firm and further accelerated, with overboard orders growing at a slower pace. It is just that its domestic orders that have been slowing and even declining, I would suggest over the previous month so thus that weakness resides domestically.

In response to the survey that we had sent out for the HSBC PMI, the survey respondents say they still struggle with power outages that prevent them from operating at full capacity. That in turn is also making it difficult for them to meet their order books. So, you still have a rise backlogs of work on the back of that and still see a combination of domestic demand softening on the back of some of the slowdown we have seen in reform momentum. In addition, the economy is also struggling with the supply side constraint from lack of power.

The good news though is that on the inflation front things continue to ease with both input and output prices coming off and output prices have actually declined over the previous months.

Q: On Friday, when we got 5 percent GDP number for FY13, most economists did not see too much scope of an improvement going ahead. What is your estimate of where the Q1 GDP number could be and for FY14 itself would you scale down your GDP estimates? What are they currently?

A: I would certainly agree that if you look at the data flow we had subsequent to the last quarter GDP number that came out for January-March, things are certainly slow. PMI readings both in the manufacturing and services sector have come off the average luggage that we saw in January-March quarter. It certainly suggests that there is some further softening, there is some softening in the momentum going into the first quarter of this fiscal. So, in terms of annual growth numbers, we are going relatively close to where we were in the final quarter of last year.

We are still cruising along the bottom at the moment in India. We have to be a lot deeper into the fiscal year. So from October-December quarter onwards, before we start to see a bit of a pick up in growth, we may see somewhat more traction and implementation of structural reforms and also some of the investment projects that hopefully get expedited with investment committee.

Secondly, we should also have somewhat better global economic backdrop when we get deeper into the fiscal year that could also provide some impetus to growth. The growth forecast for the current fiscal year is 6 percent. The balance of risks surrounding those forecast are sort of tilted to the downside at the moment.

Q: Six percent for FY14 and where are you on Q1 GDP? What is your expectation from the Reserve Bank of India (RBI) on June 17? How will they take into cognizance all this data?

A: On first quarter GDP, we are going to be in the 4.8-5 percent range at best, so more or less sideways movement on that front. As far as RBI is concerned, there is high probability now that they may also cut policy rates at the June meeting by 25 basis points. But the scope for further monetary easing is somewhat limited.

The economy is supply constrained. You don't solve these issues by being very aggressive in terms of easing demand management policies. That ultimately will prove inflationary. Ultimately, the impetus to growth has to come from people who will strive to perform and that also means that it is going to be much more of a protracted recovery that we are facing.