Re at 70 by Year-end is a Rea­son­able Tar­get

The Economic Times - - Money -

In a chat with ET NOW, Ra­jeev Ma­lik, se­nior econ­o­mist, CLSA, says In­dia’s medium term story re­mains com­pelling but near term cycli­cal chal­lenges will re­quire in­vestors to be pa­tient. Edited ex­cerpts:


You are mak­ing a case that Re­serve Bank of In­dia will not cut rates and we should not frankly get fix­ated with the head­line rate cut, let us fo­cus on trans­mis­sion and other el­e­ments… That is right. As you rightly men­tioned that many in the mar­ket have started talk­ing about a 50 bps move, which quite frankly to me was puz­zling. There is re­ally not much of a case for that kind of a move. While we got the quar­ter per­cent­age point, the big­ger play was re­ally in the re­vi­sion as far as the liq­uid­ity frame­work is con­cerned. Mar­kets will take some time to fully grasp what a pretty pos­i­tive move this is both from a struc­tural an­gle and from a near term an­gle. From our prac­ti­cal pur­poses, the fo­cus is go­ing to be much more on trans­mis­sion of prior rate cuts. With the new re­vi­sion to the liq­uid­ity frame­work, mar­ket rates and yields will ac­tu­ally come down fur­ther even if the repo rate is not cut.

Trans­mis­sion might hap­pen, but what if there is no de­mand at the end of it for loans? If you think about how typ­i­cally re­ces­sions are ad­dressed and In­dia is not in a re­ces­sion. It is by bring­ing down the cost of bor­row­ing and at some point that be­gins to have a more pos­i­tive im­pact. Part of the chal­lenge with In­dia are the un­re­al­is­tic ex­pec­ta­tions that all of a sud­den de­mand will pick up and go off the charts. The op­er­a­tive word is go­ing to be ‘pa­tience’. If you think about both the global head­winds and do­mes­tic head­winds — whether it is the in­debted na­ture of cor­po­rates, low ca­pac­ity util­i­sa­tion rates, asset qual­ity as far as banks are con­cerned and struc­tural rigid­ity as far as in­fla­tion is con­cerned, all have not nec­es­sar­ily gone away. So any­one ex­pect­ing any quick turn­around is re­ally wish­ing for the moon. We will see grad­ual un­even pick up be­gin­ning to take place. Do not for­get that the broader global set­ting is not re­ally all that con­ducive and nei­ther is the do­mes­tic side equally. There are cer­tainly pock­ets within the in­fra­struc­ture sec­tor where ac­tiv­ity is pick­ing up, roads are very much a good case in point. In the power sec­tor, a fair amount of ef­fec­tive work has been done; rail­ways will also grad­u­ally come through. At the ag­gre­gate level, it is not as if ev­ery­thing is go­ing hunky-dory but quite frankly, the ex­pec­ta­tion for that is it­self mis­placed.

Do you ex­pect price ac­tion to show a pos­i­tive RBI pol­icy out­come? I cer­tainly think so. In fact, any day I would pre­fer the com­bi­na­tion that came through Tues­day — a quar­ter per­cent­age point rate cut with some sig­nif­i­cant struc­turally pos­i­tive move on liq­uid­ity frame­work rather than pure vanilla 50 bps move. I think it is un­for­tu­nate that Tues­day’s price ac­tion was heav­ily im­pacted by global fac­tors as well. I think two im­por­tant as­pects — one, when RBI talks about mov­ing from a deficit of 1% to neu­tral set­ting on av­er­age, the op­er­a­tive ex­pres­sion there is on av­er­age. It does not mean ev­ery day, ev­ery week and ev­ery month the sys­tem is go­ing to be at a neu­tral level. It is over a whole-year pe­riod. So, monthly dis­tri­bu­tion could vary. The sec­ond as­pect is a lot of these changes are go­ing to be grad­ual. The gover­nor talked about one to two years. I do not think it will be that long, but clearly it is not some­thing that sud­denly hap­pens in a week or two. RBI has cut rates but the other side of the equa­tion — eco­nomic ac­tiv­ity is not pick­ing up… I think it is al­ways dif­fi­cult to ar­gue the counter-fac­tual. Things would have been worse if RBI had not cut (rates). The more im­por­tant as­pect in In­dia has been the poor trans­mis­sion which in­creas­ingly is get­ting ad­dressed. That’s why I men­tioned for the re­main­der of the year even if RBI does not cut the repo rate fur­ther, ac­tual mar­ket rates are ac­tu­ally go­ing to come off a lot more.

You sound fairly con­fi­dent of a gen­uine re­cov­ery be­ing on track… Well, I do not know about party talk. I think it is im­por­tant to re­alise two pa­ram­e­ters where growth dy­nam­ics are con­cerned; one, on-the-ground ac­tiv­ity is not as ro­bust or im­pres­sive as the GDP num­bers tend to point out. The sec­ond as­pect is you are only see­ing signs of im­prove­ment that is very dif­fer­ent from 12 months ago when there was uni­for­mity in not re­ally hav­ing very many sig­nals com­ing through. So, I think the medium term story re­mains com­pelling. The near term cycli­cal chal­lenges — both do­mes­tic and ex­ter­nal — will re­quire in­vestors to be pa­tient but there are pock­ets that are com­ing to­gether. Is it ten­ta­tive? Is it early? Ab­so­lutely, but six-eight months down the line, we will look back and say that these were the build­ing blocks.

Which way do you ex­pect the cur­rency to move and where do you hold your bias on whether the cur­rency is go­ing to be stronger? There is a mis­guided po­lit­i­cal fo­cus in In­dia on the cur­rency which is to have a strong cur­rency in the be­lief that a stronger is bet­ter than a weaker cur­rency. Ex­change rate should re­ally be thought about as a shock ab­sorber. Given the broader pa­ram­e­ters in terms of In­dia’s higher rel­a­tive in­fla­tion, dif­fer­en­tial grad­ual ru­pee de­pre­ci­a­tion will still be very much the play. March was a very good case in point where flows picked up, the dol­lar weak­ened and the ru­pee ac­tu­ally strength­ened although peo­ple over­looked it as it was still the worst per­form­ing Asian cur­rency. We think that 70 by end of this year is a rea­son­able tar­get for ru­pee. We ex­pect the Fed to come through with a cou­ple of rate hikes in the sec­ond half of the year which will give a bit of a bid as far as the dol­lar it­self is con­cerned.

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