Moody's cuts India GDP target to 7%, says still good enough

Ratings agency Moody's has downgraded the country's 2015-16 gross domestic product (GDP) growth target to 7 percent, from 7.5 percent earlier.In its Global Macro Outlook report, the firm said it had slashed its growth outlook "in light of a drier than average monsoon" though it added that it expects GDP growth to go back to 7.5 percent in the next fiscal.In an interview with CNBC-TV18, Moody's Atsi Sheth, however, said that the forecast wasn't entirely driven by the ongoing weakness in monsoon."We've looked high frequency data and what we see is that industrial recovery is proceeding but very slowly," she told Sonia Shenoy and Latha Venkatesh in an interview.The senior Moody's executive added that she expects the lower demand to reflect in lower inflation -- "it may be below RBI's 6 percent target next year" -- but said that the central bank will look to the monsoon progress before taking a call on interest rates."I should emphasise that even at 7 percent, India is among the fastest-growing among emerging market countries," Sheth said.Below is the transcript of the interview on CNBC-TV18.Sonia: What is the reason behind this forecast cut? As of now there has been no real shock in terms of monsoons but you have still gone ahead and scaled down your estimates, why is that? A: It is not just the monsoon that has driven the forecast slightly lower and I should emphasise that even at 7 percent, India is according to our forecast amongst the fastest growing economies in specially the emerging market universe. So, this is still a very high rate of growth in our view. The reason we have adjusted it down is we have looked at the high frequency data and what we have seen is that the industrial recovery is proceeding but it is proceeding very slowly. We find that industrial recovery normally determines how growth will perform over the rest of the year and we find that instead of about 7.5 percent, it is looking like it is going to be closer to 7 percent.Latha: Will this slow growth have a concomitant impact on inflation?A: We are already seeing that in some ways and I am glad you asked that question because what we are seeing in inflation is that inflation has been a little bit more subdued than people expected and that partly reflects lower domestic demand.Partly that was something that monetary policy was trying to do; to subdue inflation you need to subdue domestic demand. Our expectation is that inflation will be well within the Reserve Bank of India (RBIs) own target for next year that is 6 percent or probably slightly below that.Latha: Finally the rupee, it saw this quantum depreciation or sudden depreciation if you please over the past week following the Chinese depreciation. Is there more to go, do you think it stabilises at 65 per dollar or is it a much weaker number by the time the year is out? A: Compared to 2013 and now, the factors driving the rupee down in the years even preceding 2013 were largely domestic. They were domestic policy, current account deficit, etc. Now, it is really the external environment. So, what you saw happen last week was the effect of capital flows in and out of country that were driven not by India specific factors but by global factors. Those global factors are likely to be on the side of the depreciation in the near-term given what we are expecting with the potential for US federal reserve rate hike, further uncertainty about global growth. We think that might put little bit more pressure but from a fundamental perspective we do believe that India’s external accounts are relatively well positioned to absorb a little bit of volatility on the exchange rate.Sonia: You mentioned a slower pace of industrial recovery and that could impact the gross domestic product (GDP). Will that nudge the RBI to cut rates much ahead of the September policy you think?A: I think the RBI has itself outlined the thing that it is looking at. One was the monsoon, which as you pointed out before, has not been as weak as was initially expected. The second though will be regardless of how the monsoon performs whether food prices will revive again and that is one thing that we don’t quite know yet. The third is the RBIs own view on India’s vulnerability vis-à-vis the rest of the world.So, the growth indicators are definitely pointing to the need for perhaps a little bit more stimulus but there are other factors that might give the RBI a pause with inflation and the external environment being too.