‘Lo­cal Is­sues to Out­weigh Trump Im­pact’

The Economic Times - - Money & Banking -

Source: IR­DAI, cos’ web­site in­ter­est rate chan­nel, the threat of pro­tec­tion­ism and over­all sen­ti­ment and the risk ap­petite in global fi­nan­cial mar­kets from de­vel­op­ments in the US. If US changes rates and dol­lar strength­ens, no­body is left with­out an im­pact. We looked at 30 years’ data across the world. The ru­pee also weak­ens if there is a shock hike, but com­pared to other cur­ren­cies in Asia, the im­pact is limited his­tor­i­cally. Al­though the global en­vi­ron­ment is very im­por­tant for ev­ery­body, I think for In­dia do­mes­tic de­vel­op­ments will play a much big­ger role than for­eign de­vel­op­ments.

The new US ad­min­is­tra­tion ap­pears to be in­ward look­ing. Will it change the way the globe trades? It is look­ing in­creas­ingly in­ward. That would give more room to China to in­crease its sphere of in­flu­ence across Asia. Al­ready China has been very vo­cal about how it wants to be more in­flu­en­tial across the world. The US in­tro­ver­sion is go­ing to make it eas­ier for China to achieve its goals. A global trade war would be in no one’s in­ter­est. The main im­pact of a trade war and pro­tec­tion­ism would be high in­fla­tion, and high in­fla­tion would mean high in­ter­est rates. If the US im­poses a tar­iff, it will hurt Amer­i­can com­pa­nies be­cause a lot of these com­pa­nies are us­ing im­ported com­po­nents. Also, a tar­iff is paid by the con­sumer, so it will be a tax on the US con­sumers. If you put a tar­iff on Chi­nese goods, it’s usu­ally the lower in­come con­sumer that will be af­fected. That will have sig­nif­i­cant im­pli­ca­tions.

We are see­ing crude and com­mod­ity prices firm up, so how do you see it play­ing out on cur­rent ac­count deficit? We think oil prices will keep ris­ing. We see it mod­er­at­ing to $60 to $65 a bar­rel in FY18. It will be around 30% higher over the pre­vi­ous year. At $60, it is not a rea­son to worry. It will not be ex­tremely dis­rup­tive. There will be some reper­cus­sions for sure. For in­stance, cur­rent ac­count deficit may widen to 1.7% of GDP from less than 1% of GDP. On the cap­i­tal flows front, FDI re­mains strong and that should eas­ily fund the cur­rent ac­count deficit.

For In­dia, the big­ger worry is on the fis­cal side. On gov­ern­ment fi­nances, we don’t think $60 a bar­rel will have too much of an im­pact in FY18, may be a lit­tle higher fuel sub­sidy. Yes it will have an im­pact on in­fla­tion be­cause prices now move more in line with global prices. Weak pric­ing power can take in­fla­tion closer to 4.5%, which was the case last year. So, we are un­likely to have a dis­rup­tive eco­nomic im­pact if the In­dian crude bas­ket is at $60 a bar­rel. Comapny Photo 28% 45% 1% 24% 19% 7% There are con­flict­ing opin­ion about growth as well as in­fla­tion in In­dia now. What is your call? On growth, we are more con­ser­va­tive. We ex­pect growth to reach 7.2% in FY18 ver­sus 6.8% in FY17. We see down­side risks to it, three head­winds par­tic­u­larly. One is re­mon­eti­sa­tion ex­er­cise, which is still hap­pen­ing and we ex­pect the af­ter­ef­fects to linger on to the sec­ond part of 2017. The sec­ond fac­tor is GST. We have seen its neg­a­tive im­pact on growth in the first year of im­ple­men­ta­tion across the coun­tries. Given that In­dia’s GST struc­ture is a lit­tle bit more com­pli­cated and cor­po­rates are un­likely to get very long pe­riod of prepa­ra­tion, that will be an­other head­wind. Last is ob­vi­ously the ex­ter­nal un­cer­tain­ties.

What will be the im­pact on in­fla­tion with RBI shift­ing stance to neu­tral from ac­com­moda­tive? On in­fla­tion, we do have a be­nign out­look. True, oil prices are a con­cern. But given our growth out­look, we think weak pric­ing power will keep in­fla­tion un­der check. Also on the back of the whole re­mon­eti­sa­tion ex­er­cise, we might not see too much of pres­sure com­ing from hous­ing rent- als which have a weight of 10%. From a fore­cast per­spec­tive, it was 4.5% last year, we ex­pect it to be 4.6%.

Even though In­dia has done well on sev­eral pa­ram­e­ters, we are still not see­ing it re­flect on our sov­er­eign rat­ings. We do not ex­pect a rat­ings change in 2017. There are changes in the right di­rec­tion. But if we look at the fis­cal sit­u­a­tion, con­sol­i­da­tion has hap­pened. But at the com­bined level - states and the Cen­tre’s taken to­gether - we are still at 6.5% to 7% of GDP, which is higher than the economies like In­done­sia. Sec­ond, re­forms have been hap­pen­ing which has been ac­knowl­edged by both in­vestors and the rat­ing agen­cies. The ques­tion is if we see some­thing more con­crete like if GST is im­ple­mented, we may see an up­grade in out­look prob­a­bly in 2018 rather than in 2017.

What do you ex­pect our Mone­tary Pol­icy Com­mit­tee’s im­pact on rate? We do not ex­pect any fur­ther rate cut now in 2017. RBI’s de­ci­sion to move from an ac­com­moda­tive to neu­tral liq­uid­ity stance was a sur­prise. What can move it back to­wards an ac­com­moda­tive stance? Analysing pol­icy state­ments since 2004, we found that usu­ally when there is a hike or a cut, it never hap­pens when RBI has a neu­tral stance. They al­ways change to hawk­ish or ac­com­moda­tive be­fore mak­ing changes to rates. If you have to change it, we need to know what quan­tum of rate cut we are look­ing for. The global en­vi­ron­ment has a lot of un­cer­tain­ties. Bar­ring event risks, we ex­pect rates to stay at cur­rent lev­els.


April-Jan 2017 April-Jan 2016 Growth Life In­surer SBI Life Tata AIA ICICI Pru Ba­jaj Al­lianz In­dia First FYTD Jan'17

22.60% 3.30% 24.20% 3.40% 1.20% Change (bps)

318 107 58 58 39 Life In­surer HDFC Life Reliance Life PNB MetLife Ae­gon Life Aviva FYTD Jan'17

11.80% 2.50% 3.50% 0.30% 0.40% Change (bps)

-279 -158 -59 -32 -29

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