Expect 125-bps cut, 7.5% growth across FY14: Credit Suisse

Robert Prior-Wandesforde of Credit Suisse explains on CNBC-TV18 that he expects a 125-bps cut in rates across the year based on indications by the RBI on shifting its focus from inflation to growth with the government announcing reforms that have being to boost economic activity. Wandesforde adds that he expects growth to touch 7.5 percent in the FY14 fiscal.

Below is an edited transcript of the analysis on CNBC-TV18 Q: What is your outlook according to key parameters for 2013? Can you explains the rationale for a forecast of a 125-bps cut by the Reserve Bank of India (RBI) based on inflation?
A: We expect the 125-bps cut to be initiated in the following manner: A 50-bps cut on January 29, the next 50-bps cut in April and then the final 25-bps cut in July. I think the first reduction in January is still largely based on what the government actually has done in terms of reforms.
I think it should be seen largely as a belated pat on the government's back for what it has done eased of course by the fact that the last couple of inflation readings have clearly surprise the RBI on the downside, finally. I think going forward, there need to be further downside inflation surprises and I suspect that is exactly what we are going to get. I think by the middle of this year, the core wholesale price index (WPI) is expected to be below 4 percent and headline WPI to be below 6 percent. Q: What will this do to growth?
A: I think eventually it should be a positive. Obviously 125 bps of rate reductions is reasonably meaningful and I think, with a 9-12 month kind of lead time one would expect it to boost growth, which in turn helps to explain we will have eventually above consensus growth estimates for FY2013-14.
I am looking for 6.9 percent and for the following fiscal year I am looking for 7.5 percent. What I would also emphasise that a lot of these market related interest rates have been dropping for about 12 months at least. We have seen three month money rates, we have seen one-year commercial paper rates down, at least a 100 bps since the highs towards the end of 2012. So in a sense, we have already seen a monetary easing. Put that together with obviously a 20 percent depreciation of the currency and you have got actually a reasonable amount of monetary stimulus. Q: The current account deficit (CAD) in Q2 was 5.4 percent. By the logic of the trade deficit for October and November, the CAD could well be 6 percent for the current quarter. In spite of that do you expect rates to be cut so aggressively? What is your trajectory of the CAD? Is this also a cyclical one-timer or is there a structural element to it which could tie a monetary authority’s hands?
A: I think there are both cyclical and structural elements. Structurally, India’s poor export base is a problem in its historic failure to generate a success story akin to manufacturing and there are a number of reasons for that. At the same time, India has failed to make the most of its own commodity-base. India has a lot of commodities but it cannot get those commodities out of the ground in sufficient quantity to avoid sizeable imports.
So that is certainly a structural element. But there have been cyclical elements as well. I think that the initial effects of the fall in currency have been unhelpful. It boosted import prices and led to lower export prices. That actually is a negative effect for trade.
But with time or as the volume effect starts to dominate and as import growth begin to slow down in response to the higher prices and exports hopefully pick up in response to the lower prices, there is an improvement in the trade position.
Our models show that it is a question of patience since it is a bit like interest rates or inflation. I think the CAD will improve. After 4.5 percent or so this fiscal year, I think it will be down to something in the order of 3 percent next fiscal year. Q: Do you think the RBI will have the stomach to cut rates by 100 bps when the CAD still reads high?
A: Yes, I do not see why not. It has stated that it is now going to focus much more on growth. The recent fall in inflation has increased expectations that inflation will be softened and it will allow Subbarao to respond to the weakness in growth a bit more than previously. The CAD only matters where it cannot be funded.
If it can’t be funded, the symptoms would be in the form of a sharply depreciating currency. It has, of course, depreciated sharply and I think while it is hard to be structurally bullish on the currency, I think that there is going to be a period where the currency strengthens a bit, when there will be considerable inflows into the market and that means in terms of funding this deficit that the currency is at least stable if not a little bit stronger. I think that will reassure the central bank.
It should also be borne in mind that though 125 bps sounds a lot, it is actually only 25 bps below the long-term average since 2001 and above the average since 2005. So though it seems a lot, it is not about a massively loose monetary policy. Q: There has been a strong rally in the 10-year bonds. What is your analysis of how exactly the 10-year bonds could move? What exactly is it factoring-in at this point in time?
A: The 10-year bonds have started to discount the kind of scenario that is being painted. The RBI statement following the December 18th meeting was key so also the October 30th meeting when the RBI first hinted at a January-March rate cut. So clearly the bond market is now starting to get excited once again about the prospects of a RBI rate-cut, I think they are right to do so. I think as the RBI delivers there will be more. I see the 10-year yields falling at least as low as 7.5 by the middle of the year. Q: The proposal about the possible staggered increases in diesel and kerosene prices has begun to do the rounds. A telecom spectrum is slated for March 2013. What is your estimate on how FY13 could end and any preliminary estimate on FY14?
A: My current estimate is at 5.9 for the current fiscal year, but I must say the finance minister does seem incredibly committed to achieving 5.3 percent and is doing a lot of things to cut spending, at least temporarily. It should provide a cyclical boost to revenues and also a cyclical depressing factor on spending as well, I would be looking for the deficit to narrow somewhat. Perhaps if it is about 5.5 percent in the current fiscal year, it will be down to 5 percent in the following fiscal year.