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Last Updated : Sep 09, 2015 04:52 PM IST | Source: CNBC-TV18

Oil windfall being used to repair balancesheets: UBS Invest

Edward Teather, Senior Economist-ASEAN & India at UBS Investment Bank wonders where could the benefit from low oil prices go since India's growth has not picked up despite falling crude prices.

UBS on Tuesday downgraded India's GDP forecast for FY16 and FY17. Discussing the underlying reasons for the cut, Edward Teather, Senior Economist-ASEAN & India at UBS Investment Bank pointed at longer-than-expected time to reap benefits of low oil price, weak agriculture and poor pick up in manufacture.

He said GDP numbers in the last few quarters depict a slow down despite a collapse in commodity prices making one wonder "where the benefit from low oil prices actually went?"  He clarified that benefits from lower oil prices are being used to repair balance sheets and with time it will help in building a solid base.

Teather sees the RBI cutting rates by 0.75 percent in remaining part of the fiscal.   

Below is the transcript of Edward Teather's interview with Ekta Batra & Anuj Singhal on CNBC-TV18.

Ekta: Can you take us through what you thought of India's latest gross domestic product (GDP) number for the June quarter and what has made you slash your estimates to 7.1 percent?

A: We saw over the last couple of quarters the GDP numbers did slow down a bit relative to the middle of 2014 and that was interesting because oil prices have fallen sharply over that period and India is an oil importer. So it's a bit of a question as to where the benefit from low oil prices actually went.

However, we feel that those benefits from low oil prices very visible in trade numbers were saved by the government and by corporate who we think are repairing their balance sheets at the moment. It was process of balance sheet repair that we think it is taking a bit longer than we envisaged, coupled with weak external environment, (are reasons) to downgrade growth numbers.

Anuj: In that you think India missed the track by not letting the full benefit of oil prices being passed through to consumers in terms of that being a possible trigger for a bit of a revival in the economy?

A: Not at all. In the fullness of time using that windfall from low oil prices to rebuild balance sheets puts India in a much stronger position to have a sustained expansion in the future. So it is all for the better that you are getting this balance sheet repair and you have the opportunity to speed that up with low oil prices. So yes, we are getting weaker growth than we had hoped for initially but actually its building more solid base in the fullness of time.

Ekta: What is the breakup between agricultural industries as well as services that you are envisaging for FY16?

A: We are anticipating that agriculture won't do so well; we got very dry weather, the monsoon is below normal and that's happening across the region.

However, manufacturing is going to suffer from the weak external environment but overall the manufacturing numbers will probably expand roughly in line with GDP, so getting up for around 7 percent.

Ekta: You look at the entire Asian region in terms of economics as well as per my understanding. How is India placed in terms of its key macro parameters as compared to even the likes of China, Taiwan, Indonesia at this point in time when you are talking about how India benefits as a key commodity importer and on statistics such as growth as well as inflation going forward?

A: The last point you brought up about inflation, is where India does standout. India has had very high inflation over the previous four-five years; inflation averaged 10 percent until 2014 and since then inflation has come down and we think that India is also in a different position in its credit cycle.

Credit growth has been slowing for some time now. It is pretty low and as I mentioned in terms of moving into balance sheet repair phase, it is something your previous guest was certainly talking about. Those two things together and the momentum behind inflation, the fall in oil prices, the balance sheet repair process, all point to low inflation going forward.


That to us means that the Reserve Bank of India (RBI) can cut interest rate more than the market expects going forward. Therefore, we are looking for 75 bps cut by the end of the March quarter 2016 and that is something that not many economists in Asia can talk about now either because their rates are very low or they do not have that option to cut rate quite so much.

Ekta: What are you expecting in terms of rate cuts on September 29? I am assuming that since you have pencilled in 75 bps, September might be on the cards as well and going forward wouldn't commodity prices possibly bouncing back or maybe global growth recovering be a key risk to your estimate of 75 bps?

A: You are right. We do have 25 bps cut pencilled in for September 29. We think Raghuram Rajan will move gradually but we certainly have a policy rate cut in the next meeting.

Ekta: Do you think global commodity prices are bouncing back because of global growth recovering to a certain extent might be a key risk to your target of 75 bps or maybe 50 bps post September?

A: Yes both of those factors are risks. We will be happy if global growth bounces back and Raghuram Rajan would feel that he didn't need to cut interest rate but we are not very confident in that happening. Hence our forecast and commodity prices moving around this is a risk but the current environment -- it is surprising how little food prices have risen despite the dry weather and UBS' oil team has just downgraded rather than upgraded its projection for oil prices. So at the moment we are still very comfortable looking for another 75 bps from the RBI.

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First Published on Sep 9, 2015 12:50 pm
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