BofA-ML cuts India's FY14 GDP forecast to 5.5%

Indranil Sengupta, Chief Economist-India, Bank of America-Merrill Lynch (BofA ML) told CNBC-TV18 that RBI will start cutting rates once the rupee stabilises.

The broking firm lowered its India gross domestic product (GDP) estimate for FY14 to 5.5 percent versus a 5.8 percent earlier, after the central bank announced a slew of measures to curb rupee liquidity. Sengupta says the 5.8 percent estimate was based on lending rate cuts and better monsoons. However, after yesterday RBI announcement, liquidity will remain tight and there will be no lending rate cuts, therefore the revision to 5.5 percent. He further said that the FII debt inflows will depend on what happens globally rather than what happens domestically. "At the end of the day the government will need to do either a NRI bond or a sovereign bond issuance to boost FX reserves," he says. Also read: Slow reform progress to pull down GDP to 5.8% in 2013: ADB Below is the verbatim transcript of his interview to CNBC-TV18 Q: Could you walk us through how significant are these measures and the reasons for this downgrade in GDP? A: We had raised our GDP to 5.8 percent on the basis of lending rate cuts and better rains. Now clearly with what happened yesterday, liquidity will remain tight and you are not going to see lending rate cuts. We are removing that lending rate cut portion of our forecast. So, you still have an improvement in growth maybe to around 5.5 percent, but it will entirely come from a better rains and a better crop. Q: You must have heard Pratip Chaudhuri saying repeatedly it is a temporary measure. In your mind how are you looking at this? How long could this tightening last or even get tighter? A: I think it is a temporary measure. These kind of shock therapies typically are temporary.  Q: Temporary is what one quarter? A: I think sometimes even less than one quarter. We had something like that in 1995. We had governor Jalan doing the same thing in January 1998. But what typically happens is that you do get that impact on growth. Both in 1995, as well as 1998, you did see an impact on growth. Q: Jalan’s hike of January 15, 1998 was not removed for I think 18 months. I think it took all the way upto August 1999, by the time he started cutting. That ofcourse was a huge thing, it was a repo rate hike of 200 basis points and we have had reserves of what USD 20 billion at that time or USD 40 billion, it was a different situation I agree, but it was not as small as two months? A: No, I think he went down by June. He brought it down by June and then he went and did Resurgent India Bonds (RIBs) in August. Q: What will be the impact on the balance of payment (BoP)? Do you see the foreign institutional investors (FIIs) inflows in the debt market picking up and in general on account of the impact on equities, on the debt side. How do you see the BoP situation changing because of these measures? A: I think the FII debt inflows will depend on what happens globally rather than what happens domestically. I think at the end of the day the government will need to do either a NRI bond or a sovereign bond issuance to boost FX reserves. Q: How do you see the rupee now? Today there has been about one percent gain and then steadied at 59.40 thereabouts I think at this point in time. How will you trace for the next quarter? A: The Reserve Bank of India (RBI) and the government are making it fairly explicit that they want to defend 60 to the dollar and I guess barring unforeseen events this is where the rupee will stabilise in the short-run. But from a medium-term perspective I think you need to get in more FX reserves, you need to issue NRI bonds, you need to issue sovereign bonds whichever way to hold expectations in check. Otherwise, clearly the rupee will float upto 62 levels, 65 levels, may not be right now, but overtime. Q: Overtime as in by the end of the fiscal? A: Maybe not this year, maybe in the next calendar. One has to wait and see. I think the big challenge is that if the government were to raise either of these issues and you get that much FX reserves then the rupee could well stabilise. So, I think one has to wait and see how that plays out. Q: Do you expect that you will start to see rate cuts next year? Do you expect growth to get abysmal enough or do you think inflation will still remain a challenge, the government is talking about, and even now the Finance Minister is talking about the Food Security Act getting implemented in every state. So, basically do rates fall in calendar 2014? A: I think that the RBI will want to get back to rate cuts as soon as the rupee stabilises and if we do get a bond issuance in between then maybe you can start cutting rates in late 2013. So, we have factored in about 50 basis point (bps) of RBI rate cuts in FY14, the timing obviously will depend on what happens to the rupee, what happens to global factors, the RBI is able to get some lumpy capital inflows to boost FX reserves, but clearly given the way growth is, given the way inflation is at some stage rates should come down. Q: In the coming two quarters what is your expectation of GDP? A: I think the June quarter GDP should be five percent and like I said we have lowered our fiscal year forecast to 5.5 percent. Q: And the next quarter? A: Next quarter, I think September should be somewhat better. I think December will be where you get the benefit of the base effect. But the improvements are essentially coming out of base effects of agriculture, not recovery in the conventional sense.