PMI data shows no proof of domestic demand rising: JPMorgan

India's purchasing managers' index (PMI) data for manufacturing in June was unremarkable and there was no evidence of domestic demand picking up, said Sajjid Chinoy of JPMorgan. The index moved to 50.3 in June from 50.1 in May. The new orders declined for the fourth consecutive month, which points to the lack of momentum in domestic demand, Chinoy told CNBC-TV18 in an interview.

Speaking on the prospects of recovery, he said that strong monsoon, which will boost rural demand, and reduced easing fiscal deficit concerns may be the drivers of growth. However, he expects  the recovery to remain modest.   He said that the falling currency's impact was also visible on the rising input costs. He saw the Reserve Bank of India's (RBI) intervention in the forex market as a purely 'tactical' and a 'strategic' move. Also read: See FY14 GDP growth higher on reform steps: Rangarajan Below is the edited transcript of his interview to CNBC-TV18. Q: What did you make of the core numbers that came through on Monday and the June Purchasing Managers' Index (PMI) data? A: Unfortunately, not very good news. The PMI data seemed quite unremarkable at the top-line. The PMI inched up from 50.1-50.3. But the internals were much more worrying. There is still no evidence that domestic demand has picked up. New orders within the PMI have now declined for a fourth consecutive month. They are now below 50 thresholds which means month-on-month there was actually a contraction of new orders. So there is no evidence that there is any kind momentum in domestic demand. The other worry is of course the pass-through from the exchange rate to domestic prices. A very sharp pick up in input prices was seen in the PMI data. Some pick up in the output prices. Unfortunately the fears that this very sharp depreciation cannot be stagflationary where it pulls down growth and pushes up inflation had its fingerprints on yesterday's PMI. Q: What are these constituents pointing to in terms of the trajectory that growth is taking? What is happening on these core figures, the PMI, auto numbers? Cement in any case is in a lean monsoon patch. What is this adding up to? A: Any projected recovery this quarter is going to be very modest, if at all. The hope is that as the year goes on there will be two drivers of growth, a strong monsoon which later in the year should help rural demand and this year's fiscal drag being less. Remember, last year's deficit went from 5.9 percent to 4.9 percent. This year, we have got a much smaller bridge to cross. So with the fiscal drag being less, government normalising spending and some pickup in consumption after a strong monsoon is the hope. Ultimately we can only reach escape velocity if you see some signs of the capex cycle picking up and unfortunately thus far there are none. Q: In the last couple of days, some semblance of sanity has returned to the rupee market. There are talks of genuine dollar inflows etc. What is the fair value of the rupee now? Is it still really very vulnerable owing to the high CAD? So, on that parameter, how is it going to progress, where do you see the CAD? A: Some of the concerns over the last couple of weeks are not related to the CAD. The issues move from the CAD to capital account. We have seen over the last week some stability in most emerging market (EM) currencies, South Africa, Brazil, Turkey, Mexico, and Chile. Because some of these debt outflows have begun to abate; the bleeding has begun to stop. There is a nervous calm in global forex markets awaiting for what will happen on Friday. We have a very important nonfarm payrolls number. If you get a strong number on Friday, while good for US economic recovery, it could actually mean another round of selloffs in debt markets around the world. That is going to be the next big trigger. In the Indian context clearly, some stability is welcome. Last week, we saw expectations quickly get unhinged. The current account in June and July may actually not be as large as it was two months ago. We are looking at a USD 5-6 billion CAD. The worry is capital outflows. We have already seen debt outflows. The worry is if one has a round of equity outflows, then the funding constraints of the current account become extremely acute in the weeks to come. _PAGEBREAK_ Q: What will all this mean in terms of the Reserve Bank of India's (RBI) next move? So many people are now talking about the possibility of a rise in rates as well. Do you see an outside chance of that happening anytime soon? A: I do not see it just as yet. I know that is the classical response when your currency is under such pressure. But given how weak growth, domestic demand and our reliance lot on equity inflows; raising rates now could actually be counterproductive. It will give the impression that growth will weaken even further and maybe precipitate another equity outflow. So, the central bank will do well to keep policy rates on hold. I will not be surprised if interbank liquidity conditions continue to tighten i.e. more forex intervention, which is unsterilised and interbank conditions tighten and that makes it harder to short the currency. That is perhaps the preferred approach in the short run. Q: Some of your peers have suggested that a Balance of Payments (BoP) crisis could be building too. You were making the point about capital account worries. Do you think that risk is increasing in the course of next couple of months? A: Some of those concerns are exaggerated. We have USD 280 billion of reserves that cover 7 months of imports and the philosophy for the RBI has clearly been that the exchange rate is a floating rate. It is going to move to equilibrate the BoP. Any intervention will only be either tactical or strategic. I do not worry about that. I think that is exaggerating the concern. The worry is if you have a floating exchange rate, the BoP will always balance, the question is at what exchange rate it will balance. The worry is if there is more exchange rate weakness it really complicates near term macro management when growth is weak. Because it will stress corporate unhedged balance sheets and fuel more inflation. It will make the oil subsidies on the Budget even higher. So I do not worry about a BoP crisis. I worry about the near-term macro management that gets extremely complicated when the currency is falling like a stone.