Multiple policy moves may hurt investor sentiment: Deutsche

The RBI's moves on Tuesday to curb rupee volatility apart from the earlier round of measures, are likely to have a negative impact of the investor sentiment says Taimur Baig, economist, Deutsche Bank.

In an interview to CNBC-TV18, Baig says that investments may be a casualty of too many policy moves. He adds that the market is in the dark as to what the monetary authorities really want to do as there is no communication on the same.

Testimony to the negative outlook Baig has on the Indian economy is the fact that the economist has downgraded India's GDP forecast to 5 percent last week.

"The authorities have done a lot. There is no shortage of measures that one can list that have been implemented or announced in the last one year or so but for whatever reason they have not galvanised investment," adds Baig.

Below is the edited transcript of Baig’s interview to CNBC-TV18.

Q: The fear going around is what collateral damage this ends up doing to growth and investor sentiment even if the Reserve Bank of India (RBI) succeeds in its mission of filtering out some volatility in the currency market?

A: Absolutely. That is precisely the concluding remark that we wrote last night after these measures came in. There are too many measures. The messages are becoming a bit conflicting. The market is in the dark as to what the monetary authorities really want to do. The communication is muddled. On one hand people are saying this is temporary, this is not real tightening. On the other hand, it is all about tightening and the fear is that this desire to end a negative feedback loop on the forex side could be replaced with significant downside to the growth outlook because investment might be the casualty of all these efforts.

Q: Have the events of the last fortnight or so already led to a downgrade to your mind in terms of your gross domestic product (GDP) targets or are you waiting on that one?

A: We downgraded India’s GDP forecast to 5 percent last week but we tried to draw a distinction between why we were downgrading the growth outlook vis-à-vis what the RBI was doing. The argument being that interest rates act with a great deal of lag. India is a very large economy where large parts don’t have much interest sensitivity and those areas where in your view independent on what the policy metrics were trying to address.

But the reason we downgraded India is because we are not seeing any measurable pickup in investment, something that we had expected in the first quarter of this fiscal year because we thought the authorities were going to expedite investment friendly measures. The authorities have done a lot. There is no shortage of measures that one can list that have been implemented or announced in the last one year or so but for whatever reason they have not galvanised investment. That is the primary reason why we are somewhat bearish on growth and now forecasting no more than 5 percent for FY13-14.

Q: Some economist also pointed out that all these measures are unlikely to have a statutory effect on the current account deficit (CAD) situation – both what the RBI has done with regards to the currency as also the gold announcements that happened day before yesterday – would you say that you are getting a bit more bullish about the CAD situation or it hasn’t changed too much?

A: I have been fairly optimistic about the current account outlook, independent of all of these measures between decline in gold prices and softening of demand in India. One should expect both the quantity and the overall price of input, the value of input to shrink substantially this year. We are looking at 3.5 percent of GDP CAD for FY13-14. An economy that grows in an anemic manner cannot simply grow.

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From that point of view, regardless of the RBI’s measures, the current account would have adjusted. Now, taking measure of the steps that have been taken in the last quarter, fortnight or so, the authorities have tried to come up with a number of steps to discourage gold imports and that would have some impact on the margin but the bigger effect is the price effect.

Q: In its targeting of the currency which looks very clear now that 60 is the line in the sand which RBI wants to protect – do you think we could be ending up making policy mistakes because all this stock of deficit is good but if in an economy like India growth stays at 5 percent for two years on the trot could it not be doing serious medium damage to the various issues that we are setting out to resolve?

A: There are several concerns. The first one is the issue of nominal GDP growth at a time where the inflation has slowed in India. We are looking at no more than 6-7 percent inflation for the rest of the year, perhaps even lower taking the average between consumer price index and wholesale price index. In that case the GDP deflator would also growing by no more than 6-7 percent.

If one has no more than 5 percent real economic growth, the entire nominal GDP is growing by about 11-11.5 percent and that is a pretty low growth rate by India’s historical standards when we have been used to normal GDP growing by 15-16 percent.

On debt sustainability, on one hand we have interest cost going up because of higher rates and tighter policy but on the other hand normal GDP growth rate is falling the debt sustainability or keeping debt stable becomes much harder so that is collateral damage number one.

Then there is the issue of expectation. If one indeed has no more than 5-6 percent growth in the horizon, then the ROE that one expects in the investment project would have to be revised unsubstantially, precisely at a time when the cost of borrowing is going up which would be further de-sensitive for investment.

Q: What about tax collections? We have just gone through a few quarters of really tepid earnings growth and this quarter is going to be one more of that – do you think eventually the deficit issues that we are trying to resolve might actually struggle with the kind of tax collections the government gets because of very poor earnings visibility or earnings growth from corporate India?

A: This is a very complex issue. One would have to look at it sector by sector. The export oriented sectors, particularly IT is experiencing a bonanza. One has seen that in the IT stocks in the last month or so thanks to the depreciation of exchange rate and expectation of pickup of demand in the US.

That part of the economy will go very well. It is the other part of the economy where there will be concerns about earnings and what happens in terms of tax – but it will be the net impact of that, that one would have to see. I don’t think the net is that negative,  especially if the government does manage to get some disinvestment revenues and manage to tighten up on tax administration, something that we have seen actually in the last few years that they are trying very hard to increase their tax yield independent of the economic movement

Q: What about the core problem that these measures don’t work in terms of helping the currency. The experience is there with other emerging market- Brazil has raised rates by more than 100 bps, Indonesia has as well and their currencies continue to depreciate would you still say that by the end of the year the rupee is still looking like it is headed weaker rather than stronger?

A: That is the million dollar question. One could argue that the measures are too recent to assert that these measures don’t work in the context of India. The sort of depreciation that India has already allowed is something that Indonesia rupee is only beginning to undergo. They have some catch up to do.

India’s current account problem largely is the import of gold as about 3 percent GDP worth of gold came in last year. So if they can address that, it would be fairly different sort of benign a Brazil or Indonesia. I would still be cautiously optimistic about the outlook for the rupee but all these measures and the flurry with which they are coming make one a bit pessimistic. So, I am trying to be constructive but I am also getting a bit worried.