Inflation may stay below 6% in FY14: Credit Suisse

Robert Prior-Wandesforde of Credit Suisse, is optimistic on the inflation story. For the fiscal year he expects inflation to average below 6 percent.

However with uncertainties, probabilities and some eventual commodity price shock, inflation may increase towards the end of the fiscal year. He also expects cyclical improvement in growth from present situation. Below is the edited transcript of his interview to CNBC-TV18. Q: You have the most optimistic forecasts for FY14. Do you think this time around the Prime Minister's Economic Advisory Council (PMEAC) is more likely to be correct?
A: By genesis we have a similar number of 6.5 percent. There are many fundamental catalysts for recovery which I think will start in the current quarter. The interest rate environment clearly is much more helpful.
The lag effects of exchange rate depreciation is beginning to come through, business confidence will get lift from the reforms and of course the fiscal timing, which had squeezed growth heavily in the second half of the last fiscal year. That won't operate in such aggressively dis inflationary manner as it did in 2012-13. I think from hereon we will see cyclical improvement in growth. Q: Do you agree with the inflation forecast as well? It is expected to be around six percent mark, basically March inflation number is taken as the base case. Do you think there is scope for some optimism to do better than that? Some people expect inflation to break down to even below five percent and some months of FY14.
A: We are again on the optimistic side of inflation story. It takes some time to come through but it is coming through and it is particularly evident in the core level where sequential core WPI price pressures are non-existent at the moment. The headline rate will come down to between 5-5.5 percent. For the fiscal year my average for inflation is below 6 percent but with uncertainties, probabilities and some eventual commodity price shock we might see increase in inflation towards the end of the fiscal year.    
Inflation being so commodity price dependent, I think by March 2014, it will be slightly higher than the year average number of sub-6 percent.  Q: What is your view on the Current Account Deficit (CAD) forecast of 4.7 percent for FY14 because that is predicated on an export growth of around 9 percent etc?
A: Ironically, Rangarajan is being far too pessimistic which looks strange. We expect GDP at around 3.5 percent or about USD 72 billion. Data from last couple of months suggest that things are turning around now and history indicates that when things do turn around they can turn around very quickly. It takes 12-18 months for currency effects to come through. It is already 12-18 months now since the rupee started depreciating. Export growth will be a lot stronger, not because the global economy is growing particularly robustly, but because India is taking market share through the weakness of the lagged effects of the weak rupee. Q: But that is still a huge swing. It is minus 2 percent nearly for the current year exports performance. Nine percent in FY14 would be a swing of about 11 percent. Doesn’t that sound optimistic even if you assume that trade deficit will be than what Rangrajan is forecasting? Will exports come out with such flying colours?
A: That is an interesting comment, because it shows how depressed expectations have gone. It wasn’t long ago that India’s exports of goods in nominal terms were running at 30-40 percent. I do not think 11 percent is particularly strong. It is a recent phenomenon in the grand scheme of things that India has had such weak export growth. Q: Do you suspect that the Reserve Bank will go with similar expectations of 6.4 percent odd GDP growth for the current year and around 6 percent inflation forecast and if they do on May 3, 2013 what might they do in terms of policy action on May 3?
A: I suspect that inflation number will be quite similar. The forecasts are reacting to the recent numbers rather than leading them. I suspect that growth figure could be a little bit lower, but I would be surprised if the RBI did not cut rates again in the upcoming policy meet. Right now we are looking at 25 bps in rate cut and then a total of another 75 bps from here as the headline inflation rates move down to 5 percent. Q: They are expecting services to bounce to 7.7 percent versus 6.6 percent. We have seen tell-tell signs of slowdown in the services figure in the last GDP number as well. Secondly, on manufacturing they are expecting growth to double, 4 percent versus 1.9 percent?
A: My numbers are almost similar to their numbers. I am slightly more optimistic on the manufacturing side. I wish to give my relative optimism on the exports. Manufacturing will benefit a bit more than what is being suggested. I think he is implying for a strong agricultural figure of 3.5 percent. That is a wild card. The risk to that one maybe slightly on the lower side, but on the manufacturing side the risks are on the upside. Q: You said USD 72 billion trade deficit. What is your CAD number in that case?
A: My CAD is 72 billion, 3.5 percent. Q: What is your forecast for the savings and the gross fixed capital formation? Rangarajan expects the investment rate to stay around 36 percent. I haven’t yet come across a savings forecast though he expects, at least there is a hope in the first chapter that whatever is saved will be in financial savings and will not go to non-financial savings. What is your figure for that?
A: In terms of the investment-GDP ratio, investments will grow roughly inline with GDP as a whole if not a bit stronger. I think now there is much more pessimism about capex. I think it will recover faster.
In fact, it is already recovering. If we look at capital goods production, all the investment components of GDP - both of those have trended higher. The market is going to pleasantly surprised by the pick up in capex in the coming year.