Credit Suisse upbeat on India's growth; sees FY14 GDP at 6%

Robert Prior-Wandesforde, Director, Asian Economics Research, Credit Suisse belongs to the camp who believes that India’s fundamentals remain strong despite the country growing slowest in four years in April-June quarter. India's first quarter GDP came in at a lower-than-expected 4.4 percent as the manufacturing and mining sectors contracted.

Just like India’s policy-makers, Wandesforde is also optimistic on India's growth story and expects FY14 GDP growth to be better than FY13. Credit Suisse maintains its FY14 GDP growth estimate at 6 percent. “Fiscal policy, monsoon and exchange rate are more helpful, so all those things point to better growth,” he told CNBC-TV18. The next event that market will be closely following is September 18 mid-quarter review of monetary policy. According to Wandesforde, market is expecting positive credit commentary from new RBI governor Raghuram G Rajan.  Rajan is 23th RBI governor and succeeds D Subbarao, who ends his five year long stint with the central bank on September 4. He further added that the government needs to be proactive rather than just reacting under pressure. Below is the edited transcript of Robert Prior-Wandesforde’s interview with CNBC-TV18 Q: If you have to get your 6 percent on gross domestic product (GDP), you need a very sharp recovery in the second half starting October, there is also a political disturbance at that time in the form of going to polls, so do you think that could upset the applecart and we could get closer to 4 percent? A: I indicated that I thought that the risks were very clearly on the downside unfortunately to that 6 percent number, but my intention was to indicate that the fundamentals are still better than people generally believe. People are caught up in all the doom and gloom that surrounds India at the moment. But if we take a step back and do think about those fundamentals then it seems to me that there are good reasons to believe that growth will be stronger in a current fiscal year than the last fiscal year. Fiscal policy, monsoon and the exchange rate are clearly more helpful. So, all those things point to better growth. It is very easy to be very gloomy right now but as I said, let us take a step back and think more closely about it. Q: What is your sense about the pressure on the rupee? Do you think it abates sometime now, when do you think the Reserve Bank of India (RBI) could pullback from this fairly unnatural 10.25 overnight rate when growth is at 4 percent? A: I do think we need to see more in a way of action and words possibly more importantly over the coming weeks and months to be confident this is going to be settled down. I don’t think we have reached the end of this quite yet. I hope I am wrong about that but above all else, the market is looking for some credible commentary from the new Reserve Bank of India (RBI) governor. The market has been disappointed by the absence of RBI commentary so far. The silence has been deafening. I know Raghuram Rajan does not take over formally until September 5, but the market had hoped to have heard something by now. Q: How bad does it get, people are talking about 70/USD very freely? A: That is entirely possible if we don’t get some concerted credible words and action from the policymakers. One of the issues here is there has been a drip-drip-drip approach to dealing with the current market turmoil. The RBI, the government has not succeeded in getting ahead of the curve. It is being catching up, you are going to feel it is catching up the whole time reacting to the pressure from the markets rather than be more proactive there. I do hope nothing has changed, none of us however can guarantee that they will though sadly and there are all political constraints that you had referred to that make it more difficult to act unfortunately. Q: We haven’t yet seen foreign funds flow out with any ferocity, the rupee is depleted even without that kind of a pullout, it has been marginal compared to the amount of money that foreign funds have put in even this year, do you suspect that there could be big pullout or do you think the rupee is factoring in some of that already? A: I am surprised by the lack of reaction from foreigners not least given the weakness in currency. I thought by now we would have seen more withdrawals from foreigners, most of them must be sitting on rather large losses in their own domestic currencies even given the weakness of the rupee. It is hard to explain and there is a danger that suddenly we are reaching the tipping point and all those money flows out if we don’t get any good news soon. The other thing I would note is that the foreign funds into India are often very sticky. If we look back at another crisis or mini crisis, foreign funds merely don’t react that aggressively. So that money is sticky and let us hope it stays sticky.