Credit Suisse cuts FY13 GDP forecast to 6% from 6.5%

Many influential economists have downgraded their gross domestic product (GDP) forecast.

Credit Suisse has cut its GDP numbers to 6 percent versus 6.5 percent for FY13 and 7.2 percent versus 7.8 percent for FY14.

In an interview to CNBC-TV18, Robert Prior-Wandesforde, head of India & South East Asia Economics of Credit Suisse says growth has probably bottomed in the March quarter of calendar 2012. "I want to stress that we are still relatively optimistic compared to many," he adds.

Also read: India rating outlook remains 'stable', says Moody's

Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

Q: What your GDP forecast is at this point in time? What is the rationale behind the changes that you have undertaken?

A: It is 6 percent for this fiscal year, 7.2 percent for next fiscal year. To be honest, this is a fairly belated reduction of projections. It reflects the fact that we underestimated the negative effects of some of the rate hikes. Also, the rate cuts are coming through later than we previously anticipated. So, obviously the ensuing growth benefits from those cuts will also come later.

The more important point to stress is that we are above consensus. I am happy to be above consensus. Our feeling is that some people are getting too carried away with the gloom. There is almost a sense of a race to the bottom now. You could have the lowest growth number on the street. I think that has gone too far now.

Although growth is poor, I do not think it is that poor. I think growth has probably bottomed in the March quarter of calendar 2012. I want to stress that we are still relatively optimistic compared to many.

Q: Even after cutting, you are north of most of the forecasts. What is giving you this optimism? We have only one GDP reading so far. That is 5.5 percent. So, you must obviously be expecting the remaining three quarters to average well over 6-6.5 percent in some quarter.

A: Yes, we certainly look for an improvement of about a percentage point between fiscal Q1 and Q4 of the year. There are three reasons. One, we think the previous depreciation of the rupee, which, at one point, was more than 20%, is and will continue to have beneficial effects for net exports; real exports versus real imports.

Secondly, while interest rates are certainly not a positive factor yet, they are becoming less of a negative. The lagged effects of all the rate hikes, which we saw through 2010 and 2011, the worst effects of those are beginning to diminish.

Thirdly, the reforms, it is too early to suggest that we are going to get a sort of structural revolution from this and a huge boost to investment as a result of it. I think towards the end of fiscal year, assuming these reforms are implemented and if anything extended then this will benefit business sentiment. We will see some tentative improvement in capital spending towards the end of the current fiscal year.

I certainly do not want to suggest that India is on the cusp of some sort of V-shape recovery, some quick move back to above-trend growth rates. But people are exaggerating some of the negatives.

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Q: What are you factoring in by way of the Reserve Bank of India’s (RBI) action? That would be necessary, isn’t it for a V-shaped recovery?

A: Yes, that would certainly be important. First of all, industrial production, we only had July numbers. So, we do not know what is going to happen in August and September. We have got very little data to be frank on the current quarter.

As far as the RBI is concerned, our forecast remains unchanged and very aggressive. We continue to look for 50 bps reduction in the October meeting. I think could that probably be best described as a pat on the back for the government following the recent changes.

Thereafter, I think we are again dependent on inflation coming down or atleast wholesale price index (WPI), ex-fuel inflation, coming down. It is an important point, given the diesel price hike. I still think it will do. I think that in turn will drive upto another 75 bps of reduction.

We continue to expect a 125 bps of RBI cuts by the end of the current fiscal year. That is part of the reasons or last part of the reasons of what we expect growth to hit or average 7.2 percent in 2013-2014.