Year 2015 will see CAD and inflation under control, rising GDP, but not a complete goldilocks situation, says Chetan Ahya, chief Asia economist, managing director, Morgan Stanley. He sees a gradual acceleration in GDP and it may inch towards 6 percent toward the end of 2015.
He says recovery in capex is still weak as of now, but it is bottoming out, while adding that capex will be the key driver of growth recovery for India. According to him, there is some improvement in capital goods imports.
On the difference in opinion between the Reserve Bank and the finance ministry, he believes Raghuram Rajan and Arun Jaitley's objectives are not different. He says the finance minister has already clarified that he will leave it to Rajan to decide when to reduce interest rates.
Ahya sees RBI reducing rates in February, latest by March. He sees a 25 basis points (bps) rate cut in February or March and has a base case scenario of 50 bps rate cut in 2015. In a bull case scenario, RBI may lower rates by 100 bps in 2015, he adds.
Below is the verbatim transcript of Chetan Ahya's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: What are the big macro numbers that you have for 2015; how is growth for starters?
A: The broad macro theme for 2015 what we have is that we are completely out of the stagflation type of scenario that we had been there for years. What we are going to see is inflation staying in control, current account deficit staying in control and growth gradually accelerating. So, not calling completely goldilocks but towards goldilocks kind of scenario is what we are seeing 2015 as the big picture story.
Latha: It will be 5.5 percent for every quarter or do we get to 6 percent before 2015 calendar is out?
A: We do get to 6 percent towards the end of the calendar 2015. For the full year March 2016, we have the gross domestic product (GDP) at 6.5 percent going up from 5.7 percent for March 2015. We are seeing gradual acceleration. I think the key feature of this acceleration that we have is the recovery in capex which has been still pretty weak as of now but we are seeing early signs of capex bottoming out.
If you see the data for engineering and construction companies’ order book, order inflows or capex under implementation some improvement in capital goods imports as well. So, we think that finally the capex to GDP number which for the last few years had been constantly declining, will now see a recovery going forward and that will be the key driver of growth recovery in FY16.
Sonia: There has been so much news flow about the pressure tactics that the Finance Minister might be using on the Reserve Bank of India (RBI) Governor to cut rates. What have you made of all of this, of course he has gone ahead and denied it but do you think the RBI Governor will succumb and will we see a rate cut sooner rather than later?
A: The finance minister has already clarified so we should not ramp this thing further into a major debate between the finance minister and the governor. I think the ministry of finance in many ways has said that we will leave the RBI to decide so I think we should believe that.
However, in any case the objectives of the Governor or the ministry of finance are not any different. We have known that higher inflation has been a problem even for politicians so finally now there is a free hand to RBI because inflation was a big issue and so to that extent I think the RBI will cut interest rates only once they feel comfortable about inflation.
Now the question is given the framework that the RBI has shared on its comfort on inflation what would be the decision on rates? Our view is that inflation is now decidedly down to 6 percent. From March 2015 you will see it staying at 6 percent that is what RBI is saying too. The RBI has already indicated that they will cut rates in early next year and so we are building for a rate cut in February and possibility that if not in February it would go to March but most likely it will be in February that they will do a 25 bps rate cut in policy rates.
Latha: What are you expecting for the full year in terms of rate cuts?
A: In the full year we are expecting in our base case at 50 basis points. However, with the way the oil is it is still unclear as to where exactly oil will settle. We are also giving out a bull case scenario where inflation transitions to 5 percent from June 2015 and in that case the RBI could potentially cut by 100 basis points. However, given the real policy rate target or the comfort zone which the Governor has shared, we think a 50 basis points rate cut in 2015 calendar year should be the base case that we should assume right now.
We should also try and bring in this point on interest rates that while the RBI is going to be constrained by its management of inflation target the actual cost of capital for which we look at is the deposit rate. Deposit rates we expect to go down in all by 125 basis points which has been down 25 basis points already. So, another 100 basis points to go in 2015 calendar year which should be I think a more indicative approach because deposit rates are higher than policy rates and RBI is not a constraint for banks to cut deposit rates. So, that would be a more important point to watch for cost of capital than RBI’s policy rates alone.
Latha: On the rupee, are you expecting it to see a 5 percent depreciation in 2015?
A: I think rupee has become a tougher call primarily because it’s a bilateral. It’s a cross rate versus the dollar and the dollar is quite strong. On its own our view is that on a real effective exchange rate (REER) basis the fair value of rupee is around 65/USD.
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