‘Economic upturn aiding global markets, but no shortage of risks’
As global financial markets look forward to the outcome of the US Federal Reserve (US Fed) meeting this week, London-based JAN LAMBREGTS, managing director and global head of financial markets research at Rabobank International, andHUGO ERKEN, its senior economist and country analyst for North America, Mexico and India, tell Puneet Wadhwa India is on course to achieve 8.3 per cent GDP growth in the September quarter. Edited exerpts:
What are your expectations for the upcoming US Fed meet? Lambregts: We have observed the Federal Open Market Committee (FOMC) tends to get a bit ahead of itself in this cycle, overpromising but under-delivering. We previously thought there would only be two rate hikes in 2018, but we are now heavily leaning towards three hikes. That’s not as much as Jerome Powell (US Fed chairman) put on the table in his recent testimony before Congress, where four rate hikes were floated, but more in line with the consensus among the FOMC and definitely more in sync with market thinking. We expect these three hikes to happen in March, June and September.
Are bond markets factoring in this?
Lambregts: Markets are well-priced for at least three hikes in 2018, especially following the Goldilocks nonfarm payroll report. Similarly, markets expect other central banks to make a gradual move towards the exit. That’s not to say it may all be smooth sailing. Much will depend on economic drivers, i.e. against what backdrop are central banks trying to climb out of their complicated monetary policy holes. One mitigating factor is that central bankers, so far, have signaled a high degree of caution. Even as they head for the exit, they do it in small steps.
Your outlook for the markets?
Lambregts: Global equity markets are supported by a global synchronised economic upturn against a backdrop of ample liquidity. Even with major central banks shuffling slowly towards the exit of their extremely accommodative monetary policies, it still appears a rather positive background. Sadly, there is no shortage of risks, ranging from global trade wars to a recession in China and renewed instability in West Asia or ratcheted up tensions between the US and North Korea.
How is India as an investment destination among emerging markets (EMs)?
Lambregts: EMs are under pressure
in a rising interest rate environment, especially if the trade wars story has more legs to run. As usual, India benefits from a robust domestic demand component, which tends to moderate the highs and the lows in investors’ sentiment when it comes to flows. Hugo: The increased global volatility and uncertainty might explain why India’s foreign direct investment has been faltering somewhat. Going forward, we expect a continuation of upbeat investment in India as the fundamentals of the Indian economy are strong in comparison with other EMs and recent reforms of the government will continue to strengthen business conditions.
What are your expectations from the Modi government?
Hugo: Prime Minister Narendra Modi will execute his plans to support farmers and low-income groups, something which has been announced in the Budget. In our opinion, the government will not try to pursue any disrupting reform before the next general elections and before the BJP-led coalition secures a majority in the Upper House (Rajya Sabha), which is not likely to happen before 2022. Before this, we do not expect any initiative to amend the Land Acquisition Law or to step up efforts to reduce labour market rigidities. This is unfortunate as a continuation of the reform momentum is necessary to guarantee high growth standards.
How are you viewing the key macroeconomic data from India?
Hugo: We foresee the current economic recovery will continue its current trajectory. The Indian economy is fully remonetised and private consumption indicators are looking good. Even industry loans’ growth is recovering. The non-performing loans ratio shows a promising consolidation after five consecutive quarters of fast growth, which is obviously related to increased scrutiny by the Reserve Bank of India (RBI).
Trade will continue to be the weakest link because the rupee is still somewhat overvalued. We forecast GDP growth of 7.3 per cent for the January-March 2018 quarter, 7.7 per cent in April-June quarter and 8.3 per cent in July-September quarter.
One key risk we want to keep an eye on is inflation. We expect a pickup to 6.2 per cent later this year, which will induce the RBI to raise rates. For now, we expect a rate hike in the second quarter of 2018 from 6 per cent to 6.25 per cent and increase of the reverse repo rate from 5.75 per cent to 6 per cent. Keep in mind that this is our upper-bound forecast and as flexible inflation targeting is a new concept in India, we still have to see the actual response function of the RBI in case of fast-rising price pressure. In our lower-bound forecast, we expect a rate hike in the final quarter of 2018.