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Last Updated : Nov 17, 2016 04:24 PM IST | Source: CNBC-TV18

See 30-50 bps cut to 7.4% GDP growth target for FY17: Macquarie

Speaking to CNBC-TV18 Tanvee Gupta Jain of Macquarie Capital Securities said that there could be short-term pain in the next couple of quarters owing to a dip in consumer discretionary spends.


Speaking to CNBC-TV18 Tanvee Gupta Jain of Macquarie Capital Securities said that there could be short-term pain in the next couple of quarters owing to a dip in consumer discretionary spends. She was referring to the impact of demonetisation on the economy. She expects a 30-50 bps downside to their GDP estimate of 7.4 percent for FY17.  


Gupta expects the RBI to carry out 50-75 bps rate cuts over the next twelve months.

She is seeing a higher probability of 25 bps cut in RBI’s December policy.


If the FOMC is cutting policy rate, it will lead to risk aversion, she said.

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“We are confident there is scope for more policy rate cuts to balance growth and inflation.”

Below is the verbatim transcript of Tanvee Gupta Jain’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Sinhgal on CNBC-TV18.

Anuj: Couple of your peers have cut down the gross domestic product (GDP) forecast because of the demonetisation issue. Have you done some number crunching on the impact?

A: If you look at our GDP growth numbers, we are at 7.4 percent of gross value added (GVA) basis and especially on demonetisation we have been highlighting that it is a short term pain over the couple of quarters especially because consumer discretionary spending will be hit which will result in slowdown in economic activity. So, we are seeing a downside of 30-50 basis points to our full year FY17 GDP growth estimate of 7.4 percent

Latha: What about FY18?

A: FY18 we are still at 7.8 percent. We have still not adjusted our numbers because we are yet to see how much is the impact and how much money actually comes unaccounted. So, if the currency in circulation is USD 250 billion out of which USD 220 billion has been withdrawn, it is yet to be seen how much money becomes a sunk cost because of not being declared to the banking system. So, I think once we get some more numbers till December 30, only then we will be doing more data crunching on our GDP growth estimates.

Sonia: What about the rate cuts, how many rate cuts are you expecting say over the next 6-12 months and would you expect one immediately in the December policy?

A: We are now expecting 50-75 basis points rate cut by the Reserve Bank of India (RBI) over the next 12 months. If you look at because of the demonetisation itself, because we are saying that the economic activity will slowdown in the short term, our average consumer price index (CPI) inflation forecast for next year is coming at around 4.5 percent. Even if you look at the December to March for this financial year, our average CPI number is coming at 4.6 percent which is lower than the RBIs target of 5 percent for the March 2017 quarter.

So, roughly if I look at the way the math is, if I add the one year treasury bill (T-bill) yield and I look at expected inflation and considering RBI would like to have 125 basis point real interest rate in the economy, it works out at a 50-75 basis point rate cut is definitely possible over the next 12 months. Now, whether or not the RBI will go ahead and cut policy rates in the December policy, is a little tricky because the RBI policy is just a week ahead of the Fed policy on December 13. So, I guess we are seeing a higher probability of a 25 basis point rate cut to happen in the December policy. However, as I have been mentioning, it is a little tricky because the general view is that if the FOMC is going ahead and cutting policy rates, it is going to lead to risk aversion and emerging markets could see capital outflows.

Latha: I was referring to the fact that you referred to the Fed hike. We could also see slightly higher global inflation going by the way people are interpreting Trumpnomics and higher fiscal spending by the US. In that context, do you think India will have that much of a free hand to drop policy rates? Separately, where do you see the 10-year yield, December 31, March 31, next June, is it sub 6 percent, how much lower than 6 percent?

A: If we assume that globally we will be seeing central bankers going for an accommodative fiscal policy which could be inflationary, yes, but the thing is if you look at the real policy rates in India, even after taking a 50-75 basis points rate cut, they will still be positive.

So, in that scenario, we are still confident that there is definitely scope of more policy rate cuts to balance growth versus inflation because we don’t see inflation being a concern next year or even over the next few months until and unless we see any kind of weather related distortion or any sharp movement back in commodity prices which is not our base case scenario. So, if you look at my repo rate assumption, we are at 6.25 percent and our view is that the repo rate might fall back to like 5.5 percent to 5.75 percent over the next 12 months. So, 10-year, you would see somewhere close to sub 6 percent over the next 12 months.



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First Published on Nov 17, 2016 10:39 am
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