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Last Updated : Sep 21, 2015 01:24 PM IST | Source: CNBC-TV18

RBI to cut on Sep 29 but it won't be an easy decision: Ahya

The recent volatility in emerging markets as well as weak monsoon, which could spike food prices, may weigh on the central bank's decision, Morgan Stanley economist Chetan Ahya says.


The Reserve Bank of India is likely to cut interest rates by 25 basis points, noted economist Chetan Ahya of Morgan Stanley says, but adds that it would not be an "easy decision" to make.

The recent volatility in emerging markets as well as weak monsoon, which could spike food prices, may weigh on the central bank's decision, he maintained.

Morgan Stanley has cut India's GDP growth forecast by 30-40 basis points to 7.4 percent, compared to 7.3 percent last fiscal, which would correspond to 6.1 percent growth under the old series, Ahya told CNBC-TV18 in an interview.

Below is the transcript of the interview on CNBC-TV18.

Sonia: I was going through your China Economic outcome report and you say that the gross domestic product (GDP) growth will slow further in 2016 and the risks are tilted to the downside. What kind of downside risk does China hold and how much of an incremental pressure do you expect to see in financial markets?

A: The incremental number that we are seeing in terms of downside is probably another 1 percentage point or 0.8 percentage point of GDP growth from where we are having the base case which is around 6.8 from 2016.

However, I would say that the number that matters for the rest of the world is more like what happens to the industrial activity. For that we look at our own proprietary indicator called MS-CHEX, which is a composite indicator of what happens to car sales, electricity, steel, cement etc that number right now is growing at close to zero.

So the growth rate that matters to the rest of the world is not doing so great already and we think that that number will probably more stabilise and hopefully there would not be too much of a bad news for the world from China.

Latha: What is the impact for India itself, can India grow unhindered in a slowing world where you are bringing down the growth numbers for China? I noticed that you have brought down the growth numbers for India as well, can you take us through your growth expectation?

A: I would prefer to look at old index, which was for last year March 2015 was 5.7 percent and we are expecting it to go at 6.1 percent. Earlier we thought it would go at probably more like 6.4-6.5 percent, so we have brought it down by 30-40 bps on the old series as well as the new series.

The new series GDP growth for March 2016 is now 7.4, which is as I said comparable to the old series of 6.1 which is not exactly that great and that primarily is because of the fact that we are accepting that the global growth itself is weak not just China.

And it is not just China within EM -- the whole of EM space is growing quite slow and so the combination of that is we have brought global growth down to 3.1 percent for 2015. That compares to the third year average of 3.7 percent and 2003 to 2007 average of 4.9. So we are going quite weak on a global basis and that is rubbing off on our India forecast as well.

Latha: What all will RBI say on September 29 and do? What will it do to inflation forecast, what will it do to growth forecasts and what will it do by way of action?

A: I think RBI's decision is not going to be easy on September 29. Our base case right now is that they will cut by 25 bps considering all the pluses and minuses in the decision-making. In terms of the things, which are in favour, we think all the underlying sources of inflation call it government expenditure to GDP, rural wage growth, property prices, global commodity prices, even food inflation which is on a trendline basis we would say is pretty much in control.

Having said that, the negative factors for them to be concerned about is that the monsoons have been bad and food inflation could potentially move up, which has been always matters lot more for inflation expectations.

Second is that there is a volatility in emerging markets. So these are the two points which they were concerned about while taking that decision in a negative manner but we think that from a trendline perspective the fact that growth is not that strong and that you don’t have underlying domestic inflationary pressures which are building up, they should be able to cut by 25 bps on September 29.

Sonia: What about the Fed lift off because that uncertainty still hangs like a sword above our neck, given that we have seen a fair amount of global growth slowdown, do you think the Fed lift off will be held at least until the December policy?

A: That has been our base case for a while and so we do expect them to lift now in December. The reason why they did not lift in September is the way the dollar had strengthened and if you look at the impact of that on their trade as well as GDP growth and inflation, it is already showing up.

And then in the meantime because of the moves in renminbi, the trade weighted dollar had appreciated even much more. So we think they will wait to see that the dollar stabilises and that the downside from the rest of the world to their economy particularly inflation is not as much and then take up the decision in December to lift by 25 bps.

I don’t think from India perspective, we should be concerned about it because even by December 2016, we expect the Fed rate to be at 1.375 and that on a real basis is a nominal number, if you look at inflation at around 2 percent which is what the Fed would want to see when it is taking that nominal rate to 1.375, you are talking of real rates which are still negative. So what matters is real rates and real rates are not going to be that big for India to be concerned about, India's real rates have too much buffer already.

Latha: I wanted to ask you what will be the impact of all this on the real economy in terms of how much banks will cut? The RBI standing at 7.25 in terms of its lending rate and the bank that matters, State Bank of India (SBI) is standing at 9.7 in terms of base rate. Another indication, the 10-year has not gone down that much, we are still sitting at 7.7 so if you have to look at December 31 figure or a March 31 figure, where will the 10-year be, where will base rates be?

A: I am not an expert on either the treasury market or the lending rates.

Latha: When you are doing your growth numbers, you will have to have some idea of lending rates in the system, do you see them falling by half a percentage points is all I am asking without talking about bonds or base rates?

A: I do see that lending rates will follow but there are two aspects of this cycle. There is a lot of NPLs and credit cost to be taken care of and deposit rates are longer maturity so the transmission has to be what it has been so far.

I don’t think there is need to be too much -- market has worked up too much about this transmission but the fact of the matter is that this is just normal and so as you go into next twelve months, you will see that lending rate cuts definitely by 50 bps and in fact commercial paper rates are already telling you what is going to happen.

Latha: In this half a percentage point increase in GDP that you are giving for FY16 and another half a percentage point next year, irrespective of the base you are taking, you see GDP growing by 50 bps in both years incremental, where is it coming from, consumption, investment what?

A: It is coming partly from investment, partly from consumption and we are expecting that at least the external demand stabilises. So these are the three factors which I was assuming.

In terms of capex, it is going to be largely led by public capex, it has been the case so far and consumption will be more largely discretionary consumption because of two effects, one is capex creates jobs, you will have improvement in real disposable income which is already happening but it will show up in spending because of lower inflation and then some amount of support by decline in lending rate cuts helping discretionary consumption.

Finally on exports, we are building in that at least next year it won't be contracting by that 10-15 percent that we are going through this year.

More to come.

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First Published on Sep 21, 2015 10:51 am
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