A Good Mon­soon can Help Post Near-8% GDP Growth

The Economic Times - - Money -

The country is in a sweet spot with the Re­serve Bank of In­dia ad­dress­ing the bank­ing liq­uid­ity is­sue ear­lier this month. If pre­dic­tions of a nor­mal mon­soon are cor­rect, and the govern­ment suc­ceeds in push­ing re­forms in Par­lia­ment, In­dia could well in­crease its GDP growth to close to 8%, Har­i­har Krishnamoorthy, trea­surer at FirstRand Bank, told Joel Re­bello in an in­ter­view. Edited ex­cerpts:

Liq­uid­ity was the big theme in the April pol­icy de­spite the rate cut... The mar­ket had dis­counted the 25 bps rate cut which was a sa­lute to lower in­fla­tion and the fact that the govern­ment de­liv­ered on the 3.5% fis­cal deficit. It led to a ₹ 4.25 lakh crore net govern­ment bor­row­ing which is a multi-year low. The big­ger im­pact on the mar­ket was liq­uid­ity. It was an old is­sue plagu­ing the mar­ket in the con­text of trans­mis­sion, real in­ter­est rates and ques­tions on why the govern­ment se­cu­ri­ties yield curve not mov­ing be­yond 7.75% even af­ter a 125 bps cut be­tween Jan­uary 2015 and now? One fac­tor was that FIIs were pump­ing in much less into debt. The sec­ond fac­tor was de­posit growth was at a 50-yearold low and non-food credit was pick­ing up, fired by re­tail. In this con­text,liq­uid­ity be­com­ing the cor­ner­stone with a com­mit­ment to keep the mar­ket in a sur­plus or flat mode, is pow­er­ful change of thought by RBI.

Did you ex­pect this change? There was a clear recog­ni­tion that trans­mis­sion was not hap­pen­ing. There was also a com­ment in the eco­nomic sur­vey that prob­a­bly tighter money mar­ket had im­peded banks to trans­mit. So, there was a good enough rea­son and the peak of liq­uid­ity tight­en­ing hap­pened in March, so this prob­lem had not fes­tered for too long. In April, we knew that liq­uid­ity will ease off a lit­tle be­cause of govern­ment spend­ing due to a new bud­get. There are also govern­ment se­cu­ri­ties re­demp­tions in April. We are al­ready in a com­fort zone.

Have RBI’s mea­sures im­pacted the mar­ket? It has hap­pened. Psy­cho­log­i­cally, what the RBI did was very nice — it was a big change. There was spend­ing from the govern­ment, for­eign in­vestors were back. Sen­ti­ment changed, govern­ment spend­ing re­sumed and the readi­ness of the RBI to pump in money has been very clear. The RBI state­ment en­sures that this soft­ness in the liq­uid­ity will re­main. The 10-year bench­mark which was in the 7.60% range will now drop to 7.40% range. CD rates which were in the 7.80% to 7.90% have come down to 7.50%-7.60% range. Banks will cal­i­brate their de­posit rate cuts with de­posit growth. If the growth is low, their abil­ity to cut will be low.


What is your call for next six months given that RBI will not cut rates soon? We are look­ing at the mon­soon. We never had three droughts in a row. If we get a good mon­soon, which is the pre­dic­tion, it will be a pos­i­tive from in­fla­tion, de­mand and in­ter­est rate point of view. You could have a lovely sit­u­a­tion where in­fla­tion is un­der con­trol, and at the same time ru­ral in­comes go up and we could take a shot at the 7.75% to 8% GDP growth. We ex­pect credit growth to go up. Re­tail con­sump­tion de­mand is step­ping up which will drive ca­pac­ity util­i­sa­tion and, hope­fully, lay the seeds for cap­i­tal in­vest­ment. Nor­mal credit off­take will ac­cess the bank mar­ket. The MCLR regime could also be a good cat­a­lyst for credit be­cause it can lower lend­ing rates.

What is your ex­pec­ta­tion from FIIs? As the country’s fis­cal and cur­rent ac­count deficit are pos­i­tive and the worse could be over for cor­po­rate re­sults, we got to see a lot of money in eq­ui­ties. But as far as the debt mar­ket is con­cerned, the fact that in­ter­est rates are com­ing down are mak­ing ab­so­lute rates less at­trac­tive. If the Fed re­ally de­lays the hike, then the money will come in. The ru­pee move­ment will be an­other fac­tor. There could be more money com­ing this year, but it will be more in equity than debt.

Be­sides mon­soon, what should we watch out for? On the global side only Fed, be­cause China, Ja­pan and Europe will con­tinue to re­main soft which will en­sure easy liq­uid­ity. The most likely sce­nario is a 25 bps point hike in June with a prospect of 25 bps hike in De­cem­ber. Right now, In­dia is in a sweet spot where we are im­port­ing more than we are ex­port­ing and the price of im­ports is com­ing down, so the monthly trade deficit which was $20 bil­lion at peak is now $6.5 to $7 bil­lion a month. Mon­soon is the only big worry, and if the pre­dic­tions play out, we are sorted. Re­forms are work­ing out, and with a lit­tle luck in the Bud­get ses­sion, we will get a few more bills passed. The only out­side risk is a se­ri­ous com­mod­ity rally, the signs of which are not there.

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