Macquarie cuts India GDP outlook; sees INR at 61/$ by Dec

Global financial services firm Macquarie today lowered India's growth forecast for this fiscal to 5.3 percent from 6.2 percent estimated earlier, citing significant capital outflows and rupee depreciation, which in turn increased external stability risks and constrained policy rate cuts. Other key factors for the downgrade include political uncertainty and reform momentum; and a continued slowdown in new project inflows delaying a capex cycle recovery.

In an interview on CNBC-TV18, Nizam Idris of Macquarie says, despite the RBI action two days ago, there has not been much appreciation in the rupee because fundamentally the rupee should continue to weaken given the current account deficit (CAD) and fiscal deficit. He maintains a 61 forecast for the year-end for dollar-rupee.
Idris says should global growth outlook remain low, EM debt could still do well. He says if there is very strong growth in the US, making their stocks very attractive, and weak growth elsewhere, then there will be capital flowing into the US equities in a bigger way and that is when India will see bigger outflows and that will definitely be a cause for worry. He says there are possibilities of another round of EM buying, but for now markets are cautious and staying out of EM. Also Read: Falling rupee puts pressure on RBI at $2 bn debt sale Below is the verbatim transcript of Nizam Idris' interview on CNBC-TV18 Q: Despite such sharp measures which came from the Reserve Bank of India (RBI) two days ago we have not seen such a significant appreciation in rupee. It has dipped over the last two days. What is your call on the rupee and what have you made of the way it has performed and reacted to these developments?
A: The modest appreciation in rupee despite all the measures that have been thrown at the market over the last few days is really a reflection that the market is not really that long dollar-rupee. I think the market is long. Some of that has been flushed out, but it is not massive and therefore the reaction has been modest. It does not change the fact that fundamentally the rupee should continue to weaken given the Current Account Deficit (CAD) and fiscal deficit and therefore in my view with the economy also looking likely to slowdown as a result of the high cost of fund domestically dollar-rupee should go back up towards 61 again. I maintain a 61 forecast for the year-end for dollar-rupee. Q: How do you think funds might behave now? Do you see any second round of Foreign Institutional Investor (FII) selling in debt or equities or on the contrary do you think that you might actually see some bargain hunting? Yesterday UBS put out a note that they like some emerging market (EM) debt.
A: I think EM debt could do well still should global growth outlook remain low. If you are thinking that the global economy will continue to muddle through with low inflation actually, inflation is low even in the US, in that sort of environment where you get very modest growth globally and low inflation then EM bonds would remain quite attractive, yields would remain quite attractive.
The time when you really need to worry in a bigger way is if you get very strong growth in the US making stocks very attractive there, but you get very weak growth elsewhere, in which case you will see capital flowing into the US equities in a bigger way and that is when you would see bigger outflows from India. There are possibilities of another round of EM buying, but for now I think market is rather cautious and staying out of EM.