Remain pessimistic about India's growth forecast: Citigroup

In an interview to CNBC-TV18, Patrick Perretgreen, head of FX & rates strategy for Asia, Citigroup, remains pessimistic about India’s growth targets and says that significant measures need to be taken up by the government if it wants to achieve its 6.5% GDP target in FY13.

Below is an edited transcript of his interview.

Q: How have your read the news from Europe over the last few days? The euro has gone back to sub 1.22 and optimism post the EU Summit seems to have faded quite fast?

A: It’s a sort of mixed bag. We are making some very constructive progress in Europe. It doesn’t mean that the euro can go lower. Our longer range target is for that to go down to 1.15 but when you look at Spanish bond yields which are 60-70 bps off their highs of last week, it’s not all bad news, but in the global macro sense clearly things have deteriorated.

We have seen two rate cuts by China in the space of four weeks, Korea surprised with a rate cut yesterday and personally as far as the Indian economy goes, I am far less optimistic about it. I struggle to see where this bounce back is going to come from. We were just reading reports about the construction sector finding greater difficulty. It’s rather sad that people were relieved by yesterday’s 2.4% IIP figure. When you think where we have come from and when you look at where growth was in Q1 it has actually effectively contracted QoQ. So to even get to sort of 6.5% for the year as a whole we are going to have to see something very dramatic happen.

Our view on India has always been that things have to get worse for them to get better. It’s about the only thing that’s going to breakthrough this political paralysis, this budgetary indiscipline and it’s those steps that we really need to see. In terms of rate cuts, we tend to agree that the RBI will cut in the next meeting, not just because of the Indian factors, but because of the global factors.

When all the world central banks are easing in the past month or so, ECB has eased, Bank of England (BoE) has eased, the Fed’s extended Operation Twist, China has cut, Korea has cut, Australia has been cutting and India maybe strongly a domestic economy, but it’s not immune to the outside world. We tend to feel that the strains in the banking system there is actually a need for lower rates, because so far there is no evidence that lower rates have actually been passed onto borrowers.

Q: Would you say the same for the euro-dollar? Do you think it’s going to get worse before it gets better? What kind of collateral damage do you think it may do to Asian currencies if indeed it’s headed lower from here?

A: I don’t think it’s doing too much collateral damage to Asian currencies. When you look at other Asian currencies, excluding the rupee and maybe the IDR, it has actually been remarkably stable and really outperformed most other currencies. If you look at things like the Philippine peso it’s actually up against the US dollar so far this year which is another example of what good corporate governance does for a country. I am not too concerned about the euro as regards to as Asian currencies go.

Q: Where does that leave the rupee now? In the near-term do you think it can pullback some more, because it hit 57 and changed and then seems to have pulled back a bit?

A: We are actually turning more constructive on the currency. It had 30% devaluation over the past year and we think it’s in overshoot territory anyway. The stock markets are doing fairly well, credit spreads are doing better and actually the rupee is looking like an outlier. We are also getting more and more encouraged about what we are hearing on the political side.

The fact that the prime minister has effectively taken control of the Finance Ministry is a positive step and the message seems to be getting through about the need to address fiscal issues and that’s something that the RBI has been banging on about for months if not years in order for it to become more accommodative. Inflation maybe a bit of a problem in terms of food prices, but we are in a very different situation compared to when global food prices went up in 2010 when we were going with a wind in our sails of strong growth.

Now we are in a situation where, yes, food prices maybe going up globally because of sort of bad weather and poor crops, but it’s against the background of deteriorating growth. Even if you hiked diesel prices, yes, it’s a one-off hit but it would be a real positive step in the longer-term.

Q: Any year end targets for the dollar index, because emerging markets tend not to do well when there is this much strength on the dollar index?

A: On the dollar index I suppose is doing 86 but Asian markets are actually doing remarkably well and holding in against the dollar. That’s the difference. We have seen a qualitative shift in the way Asian currencies trade. There isn’t anything likely leverage on exposure we have had in previous times. So normally in risk-off periods one says sell Asian currencies that has not been the correct stance this time around.

When we consider that you have got issues such as fiscal cliff, president elections coming up, we actually tend to think that Asian currencies can for once actually do reasonably well in a general global risk-off, moderately risk-off environment. You are seeing things like foreign exchange reserves buying things like the Korean won or the Singapore dollars and also within Asia itself there is a much greater degree of cross support. So we have swap agreements, the Chiang Mai Initiative, other reserve managers buying bonds of other countries.

So Asia is becoming as a whole much more insulated. It’s not immune obviously, but overall, we still have trade surpluses if albeit growth maybe reduced, we still have a very sound fiscal position in most countries and low debt-to-GDP ratios. I talk to many clients around the world and I tell them - if you are going to buy bonds anywhere in the world, you might as well buy bonds in Asia.