India's macros to worsen; see rupee at 57/$ yr-end: RBS

Sanjay Mathur of RBS believes India's macro economic data is likely to worsen in the days to come due to the weak rupee, lack of income growth and demand slump.

Though investment environment has improved reflecting steps taken by the government, Mathur says, for it to translate into actual capex will take some more time. "All (concerns) put together, it is hard to see how the economy accelerates (going forward)," he told CNBC-TV18. He says the only cushion to growth can come from the agriculture numbers. In terms of inflation numbers, Mathur expects the CPI to drop down to 8 percent levels from the 9.31 percent registered in May. "As far as the WPI is concerned, we haven’t quite built in the rupee weakness, but I do think that sort of steady state of around 4 percent is possible over the next three months," he says. Also read: Rupee higher on hopes of custodial inflows Below is the verbatim transcript of his interview to CNBC-TV18 Q: After those tepid purchasing managers’ index (PMI) numbers for June and the bad auto sales data, what is your take on gross domestic product (GDP) growth this year? A: Right now we are at 5.3, but I do think that the odds are we slip even further. Apart from the fact that there is no income growth and demand, the investment environment has somewhat improved towards foreign direct investment (FDI). Even then to translate into actual capex would take some time. Also, we have seen a significant weakening of the rupee. If you look at the external debt numbers, clearly the weaker rupee is going to hurt the corporate sector. So, it is hard to see how the economy accelerates. The only reason why you might get growth north of 5 percent is because of the agricultural sector. Q: Is there any counter positive on the inflation front, what exactly are your wholesale price index (WPI) and consumer price index (CPI) forecasts? A: What we thought was that the WPI would increase by 60 basis points (bps) because of the rupee weakness. One needs to now look at inflation or WPI and split it between core and non-core. What you will see is an increase in fuel prices etc in the cost of tradable. However, the ability of the corporate sector to pass on these increases is going to be very limited. A lot would depend on how the Reserve Bank of India (RBI) views this. Should we be looking at the headline number or should we be looking at the pass through in the economy which would be slowing quite sharply in line with the growth conditions. Q: What is your forecast for WPI and CPI this year? A: I think what we are looking in the CPI is over the next three months and we should get down to 8 percent. As far as the WPI is concerned, we haven’t quite built in the rupee weakness. However, I do think that sort of steady state of around 4 percent is possible over the next three months. Q: What is your sense of perhaps the average dollar/rupee range could be from now-on to the end of the year, should we get used to a higher normal for the rupee? A: It is hard to calculate and average, but let me give you a couple of points on this. It has become very common place to start extrapolating the current weakness in the rupee. I would still think that we end the year with 57/USD. The first is the valuation of the rupee and you could look at it in two ways. 1) The real effective exchange rate has fallen quite sharply. If you look at the deviation of the real effective exchange rate from its 10-year trend, the rupee has deviated the most. It has fallen the most from its 10-year trend relative to other Asian currencies. Now valuations are not the only thing, but I do think that gold imports are coming down and the June trade deficit would be a pleasant surprise. It would be fall to around USD 13 billion. At the margin, the FDI regime is being liberalised. So, putting all this together, I think we are at the worst as far as the rupee is concerned. _PAGEBREAK_ Q: What are your thoughts on the food security act, can it mess up the fisc in FY15? A: Not in terms of the fisc. He had budgeted a bit of it into the budget, but having said that, the longer-term issue is much more difficult. This year food stocks are high, the monsoon is good, but think about a year in which this is not the case. That is a year when the procurement versus the subsidies would become very difficult to manage. Secondly, the problem is that once you put these sort of measures in place, regardless of which political party is there, it is just impossible to pull these things back just like the National Rural Employment Guarantee Act (NREGA). There is no hope that whichever government is there, they can pull it back. Q: Do you think all the heart one gains on inflation is going to be lost in 2014? A: It is hard to tell, but I think your point is absolutely right that in FY15 you can get higher inflation and that is for two reasons. One is that let us assume the growth does improve and pricing power to the corporate is somewhat reinstated. So, they will be passing on this cost increases. The second is that when you subsidize the price of cereals to this extent, what it means is that you are starting to look at a shift in the consumption basket of the household. So, you save some money on cereals, you are on cereals, you start to move towards protein, towards dairy. Now there is no subsidy there so the price of non-cereal starts will go up. So, you will end up higher food inflation. Q: What is the houseview on non-farm payroll data that releases today? Do you see a strong number, do you see a shift of liquidity thereafter from emerging markets (EMs) and how might India be impacted? A: Yes, we have seen a shift of liquidity. In terms of the numbers we are expecting about 175,000-185,000. I want to make one point on this. This is not about the Fed raising rates. Let us assume bond yields go to 2.75. It is not very much. What has happened and historically if you look, we have been positively correlated. Risk in Asia has been positively correlated with rising rates. The problem we have now is that we have Central Bank withdrawing liquidity at a time when there is no growth. So, you do not get that rotation into equities. Q: What is your sense, are we likely to see any kind of a rate cut or perhaps a cash reserve ratio (CRR) cut, does the RBI have any room at all in the upcoming July policy? A: I think that the RBI should cut rates and also try and tighten controls on the forex market. Be it importer hedging or such administrative measures. I think that will give them some breathing space in terms of their ability to cut rates.