Re at 70 by Year-end is a Reasonable Target
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:
PATIENCE IS KEY
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.