Yes Bank estimates FY14 GDP at 5.9%, sees 50bps cut by RBI

Leading private sector bank Yes Bank estimates FY14 GDP growth at 5.9 percent, way below the Prime Minister's Economic Advisory Council’s estimate of 6.5 percent announced today. Shubhada Rao, Chief Economist at Yes Bank told CNBC-TV18 that the bank expects economic recovery to take place only after September, hence its estimates are lower.  The bank's estimate for inflation is also tad higher at 6.4 percent against the PMEAC's assessment of 6 percent.

"It's the food inflation and the fuel inflation that we are not pricing in or budget estimating it at lower levels and that is the reason our inflation is coming in much higher, 40 bps higher than the advisory committee report," Rao explained.
PMEAC today projected the economy to grow at 6.4 percent 2013-14 mainly driven by growth in agriculture manufacturing and service sector.
Despite the higher growth and lower inflation projections by PMEAC, Rao does not expect Reserve Bank of India to go for aggressive easing. "Given the current an on-going concern on CAD and on retail inflation, 50 bps seems reasonable to expect. We are of the belief that it would get frontloaded," Rao said. Below is the verbatim transcript of the interview Q: The Prime Minister's Economic Advisory Council (PMEAC) has got thumbs up from Credit Suisse. Their numbers are 6.5 percent gross domestic products (GDP), C Rangarajan, Chairman, PMEAC says 6.4 percent. Where do you stand on these and other forecasts that you heard?
A: As far as growth is concerned we are a tad lower, not tad lower, we are about 50 bps lower at 5.9 percent. The reason being we see the recovery coming in second half more clearly than in the first two quarters of the current fiscal year. All these benign factors turning in, in the recent past will have a lag impact and as such we expect meaningful recovery taking shape only towards second half. That is the reason we are lower in terms of growth forecast number.
As far as inflation is concerned as against 6 percent, we are marginally higher at 6.4 percent. No doubt this is a pre-commodity sharp correction in oil and gold. Non-adjusting for these two our average inflation comes at 6.4 percent while we are definitely more sanguine on core inflation, we expect core inflation to remain for the large part of the year sub-4 percent. It’s the food inflation and the fuel inflation that we are not pricing in or budget estimating in at lower levels and that is the reason our inflation is coming in much higher, 40 bps higher than the Advisory committee report.
In terms of current account deficit (CAD) we are on softer ground, we are at 4.1 percent for FY14 as compared to 4.7 and that is why once again not taking into account the recent trends of commodity prices and the question of their sustaining for a longer bout of the current year. Q: What is your current account deficit?
A: We are at 4.1 percent wherein I must say that our invisibles forecast is slightly positive than committee’s report. Q: What are you expecting by way of what the Reserve Bank of India (RBI) might do? Will they speak a similar language, around 6 percent inflation and what might they do on May 3 and for the rest of 2013?
A: I think broadly RBI would have similar estimations for both growth and inflation. Our expectation is that while aggressive easing we all know is going to be ruled out, given the current an on-going concern on CAD and on retail inflation, 50 bps seems reasonable to expect. We are of the belief that it would get frontloaded. Few people talk on liquidity concerns, in my opinion the last rate cut did not result in commensurate transmission because liquidity concerns still continue to linger and in the current fiscal year we expect liquidity concerns will linger.
Therefore, it is very important for the central bank to combine the rate cut along with assuaging liquidity concerns. It could be through open market operations or through some newer tools to take care of the erratic government balances impinging on the systemic liquidity, but the fact remains that transmission would get stronger only if there is a combination of tools being unleashed in the monetary policy. Q: There are some people on the street who believe that now that the parliament session is working again, a diesel price hike might not come through for the month of April. If that is the case how will it be read by the RBI and will that in any way dent the sentiment towards the lack of fiscal consolidation or anything?
A: I would think definitely RBI is very closely watching on the subsidy discipline that the government would begin effecting. It would be good if there is some commentary from the government. Two out of three times, it has raised diesel prices, one they have skipped and our sense is that the current environment provides benign situation for the government to be able to raise, not just by 45-50 but go in one shot because the domestic situation does warrants that and if it does then RBI would take positive and encouraging tools, but if not, it would definitely receive a comment from the Governor.