Divestment target unrealistic; rate cut in Apr: Deutsche

Anuj: Too many data points, we have seen the Budget where government has allowed some leeway from the fiscal deficit, we have seen the projection of consumer price index (CPI) at 4 percent, plus or minus 2 percent and we have seen couple of other data points like petrol and diesel price hike. Given all these data points, what do you think is the likely move from Reserve Bank of India (RBI), do you think it is in a position for a rate cut ahead of policy or do you now expect a rate cut maybe in the policy itself?

A: It is more likely to be the latter. You have to also understand that the RBI is not only looking at what is happening in India but it is also looking at what is happening globally. And the global environment is becoming incrementally more and more challenging. We have seen financial market volatility rise substantially in the last few months not just because of the collapse on oil prices but also around Fed expectations of rate hike as well as a slowdown in China and we are seeing the biggest worry of all that we had going into the year that on the credit space and on the corporate debt space will start seeing stress around the world and we are being to seen that. You have seen that in Malaysia, Brazil and probably even China and India, the corporate space, 70 percent debt to equity ratio makes Indian corporates one of the most leveraged in the world. So at the Central Bank you have to look at the global trend which is putting pressure on debt. I think that we were also looking at some sort of a intermitting hike given what they did in January but I think chances are that they will wait till April now.

Ekta: What would the quantum of the cuts be and let me come back to the point, which I wanted to add, what do you make of the 3.9 percent fiscal deficit target for FY16? The math of it and how the RBI will read it and whether it will reduce the quantum of cuts that we could see in the coming year?

A: Let us take the last part first -- I don’t think the RBI will change its monetary policy part based on the Budget being 3.9 percent versus 3.6 percent but on 3.9 percent, it is clearly a much more realistic number than 4.1 percent that was presented last year. India just got incredibly lucky that oil prices collapsed and subsidy savings became substantial otherwise this 4.1 percent wouldn’t have been simply unachievable.

With respect to 3.9 percent, I think that with expectations of 0.3 percent gain on the revenue side maybe if there is some degree of optimism there that once the services tax and excises go up, it won’t have any impact on consumption and the government will be able to collect substantial additional amount remains to be seen, depends on what happens to the economy in gross domestic product (GDP) but on the disinvestment side, it is again one more year of this crazily large optimistic number given what India wants to sell, banks and commodity companies and mining companies, it is not the easiest thing to sell even when everybody likes India. So I think that disinvestment target is a bit ambitious.

One thing is that once you take the disinvestment out from last year’s numbers and this year’s numbers, this year is a fiscal slippage. It is 0.1 percent of GDP worsening of the fiscal deficit once these one-offs are taken out. So from a quality of fiscal standpoint of view, it is not the best of the Budget especially if one believes the government’s expectation that growth is going to go to 8.5 percent this year. So all of this together forms somewhat of a incoherent macro framework, it might trouble the RBI but I don’t think that is the reason the RBI would change its view, it is a small thing.