Expect FY14 GDP at 4.6%; trade deficit at USD 11 bn: HSBC

Latha: What is your spin on the GDP numbers? Will we even deliver 4.9 percent in the current year? What is your breakup for Q3 and Q4?

A: We are still looking at somewhat lower GDP growth. For the current fiscal year, we are looking at 4.6 percent year-on-year which suggests that relative to the growth we saw in the second quarter, there will be some deceleration in the second half of the fiscal year. Looking at the individual components, there would not necessarily be a repeat of the fast pace of growth we saw in agricultural sector, maybe in the final quarter of the fiscal year.

Also, if you look at the service sector, when it comes to government related services heading into the homestretch of the fiscal year there is a need for more spending constraints, so there would also be some slowdown on that front. I would also suspect that the financial services growth numbers that we had in the second quarter of the fiscal will be somewhat lower in the second half of the fiscal year.

Maybe the second quarter fiscal numbers for the financial services sector will be somewhat revised down. They were initially based on more growth in the banking sector, not the broader financial services sector and that was somewhat softer than maybe initial estimates. So we are looking for 4.6 percent for the current fiscal year.

Sonia: We have the trade deficit numbers that are coming out today for the month of January. What is your expectation? Is there any relief at all on the cards?

A: We are looking at the deficit widening a bit to around USD 11 billion, so not a significant widening on that front, a bit on the payback on the growth numbers when it comes to exports. It is in the ballpark where it has been over the last couple of months. Overall, the trade deficit is still relatively contained compared to what we have seen so far.

For the full fiscal year if you look at the current account deficit (CAD), right now we are operating with an assumption of deficit of 2.7 percent of GDP; that is about USD 50 billion for the CAD as a whole. It could actually turnout somewhat lower on that front. So, when it comes to external imbalances the situation is much better now than it was over the summer, but of course the external environment is not as friendly as it was a year ago.

Latha: While trade is yesterday's problem or current account was last year's problem, inflation continues to be last year's, the year before and this year's and next year's problem. With Reserve Bank of India (RBI) indicating that it will broadly go with Urjit's report what is your own trajectory for inflation?

A: The targets set out by the committee were the right level of inflation for the economy. It would of course be difficult to move towards that inflation number over the next couple of years. It will require resolve both on monetary and fiscal policy, but also when it comes to structural reforms and supply side measures they all have to do some heavy lifting to get inflation down to that level.

In the more near-term, food inflation will continue to ease in line with improvement we are seeing in supplies of fruits and vegetables. If you look at the CPI numbers that come out this week, we are looking at 9.4 percent, so further easing on that front.

The WPI number will also come down a bit, again led by food inflation to around 6 percent and so, headline will be lower in the next couple of months. Of more relevance to RBI though, if you look at core inflation, whether it is for WPI or for CPI, I do not really see that easing over the next couple of months. It would remain relatively stable for CPI.

Core inflation at around 8 percent for the next couple of months at least and that is testament to the still lingering underlying inflation pressures that you have in the economy that both pertain to the structural supply-demand imbalance you still have in the economy.

It has to do with some of the lagged effect of the weakening of the exchange rate and we also have an ongoing adjustment and needed adjustment in administered prices that is adding to that. On the back of that, the RBI even though it may choose to pause in the near-term will still need to tighten monetary policy further to bring underlying inflation pressures more firmly on the downward trajectory.

Latha: What about tomorrow's CPI number?

A: CPI for tomorrow, we are looking at 9.4 percent, so a decline over the previous months. All of that primarily led by food inflation easing, as I said core inflation on the other hand we expect to remain stable at 8 percent.