‘Local Issues to Outweigh Trump Impact’
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