A Good Monsoon can Help Post Near-8% GDP Growth
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.
ALL HOPES ON RAIN
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.