Hitendra Dave, managing director of Head of Global Markets, India at HSBC spoke about the kind of impact IIP and other numbers like inflation create on the India’s macro-economic situation, rupee valuations and the bond market.
“With only 2-3 auctions left in this financial year, the tendency of the yields would be to dip lower than higher,” he added.
Commenting on the rupee movement, he said that unless we fix the current account situation, we are going to have periodic bouts of rupee weakening. "There should be sustained levels of capital flows or improvement in our current accounts on a monthly basis to prevent the rupee from weakening further," he clarified.
Below is the complete interview. Also watch the accompanying video.
- How are you viewing the big picture form the economic perspective?
- I think in terms of the data, we had the full year GDP projections out, which suggested that 6.9 per cent will be the GDP growth for this fiscal. We have heard a lot of people including the RBI governor, Dr C Rangarajan also mentioning that perhaps growth will be a bit higher than 7 per cent after they revise it. I agree with the fact that the actual growth number will be a little bit higher in this quarter.
As far as IIP is concerned, it is an extremely volatile data. Apart from IIP, if you look at other data series like the HSBC market PMI, which seems to suggest that after a fall in November, by and large, there has been a bit of a bounce in December and January.
If you look at the car sales numbers in January, it doesn’t seem to show such a slowdown. If you look at the bank credit data, it seems to suggest that there is a moderation of the growth rate. So, growth is pretty much mix and not as bad as the IIP numbers suggest and not as good at what is shown by the PMI series. So net net, someone may think of the growth rate around 7 per cent; 7 or 7.5 per cent is what we are looking for this year.
- So, what is the implication from an interest rate and bond market perspective? What's the bond market working on right now?
- As far as bond yields are concerned, the dominant factor determining yields has been the mix of demand and supply since last couple of months. On the basis of the stepped up level of supply from the sovereign account of fiscal slippages, the demand domestically wasn't sufficient.
I believe that the significant amount of that gap between demand and supply has been addressed through increased locations to FIIs, bulk of which has already been taken up and almost of Rs 80 or 1000 crore of buying which the RBI has done. My own sense is that the demand-supply equation is by and large settled. With only 2-3 auctions left in this financial year, the tendency of the yields would be to dip lower than higher with very short term technical factors like whether we have open market operations in a week or we don't have, which security has been bought, etc.
With yields that are close to 8.25 per cent tapering off and by all indications, the authorities are taking a much serious look at the fiscal deficit for the next year. One would tend to have a slightly positive bias towards the bonds, which suggests that bond yields will drip lower and I would not rule out them touching close to 8 per cent before the end of the financial year.
- What the expectations are on the interest rate cuts from here on? March-April seems to be the consensus in the market for the first rate cut?
- After the last policy review, there are clearly two data points which would seem to suggest the next course of action, one would be the inflation trajectory, which we would get in the month of January. At the aggregate level, the headline number will show a sharp fall. A bulk of that is a base-effect led. I think from a Reserve Bank of India perspective, the judgment will be whether there will be sharp fall in the prices of food, vegetables and the normal items of daily usage, which have released some of the high built up inflationary expectations.
Looking at a slightly longer term perspective of what the expectation trajectory is going to be for three to six months, I think with headline numbers for two consecutive months being somewhere between 6.5 per cent plus or minus, I think their case for that is getting strengthened. We also need to recognize that we had high policy rates for so long in many previous years. The cumulative impact of that on demand is going to play out for the next six months. So, it is a close call between the rate cut in the March and in the month of April. From their perspective, they would have liked clarity on how the shape of the fiscal would be.
It looks like they are fairly serious about correcting the fiscal deficit situation; there is a talk of excise rate being high, about some kind of subsidies they would allow, etc. If it is about inflation and fiscal deficit, then things are favorable. The judgment on whether it is March or April will really be a close call. My guess is that in March, they are going to enter the new financial year and a good budget is a clear indication of a rate cut so we will be back to investment.
- The overhang on the rupee seems to have gone away?
- The rupee was clearly a worst performer among the emerging market currencies last year. There wasn't much positive news coming out last year and currency is the first place, where it gets reflected. There was widening current account data and very little portfolio flows. As far as the rupee is concerned, what we have done locally is similar to what ECB has done in the month of December.
Markets were positioned for a risk of European market breakdown, etc. All that liquidity released has clearly addressed the interbank liquidity stresses in Europe. The yields in many peripheral countries have come down quite substantially. The RBI undertook various measures in the month of November and December, the limits placed on the overnight limit and restrictions on corporate booking and re-cancellation of rebooking, etc. I think all these things have cumulated.
The reality for the rupee is that we have export and import data, which continues to suggest that we have a problem so it is not getting felt today because there is a gush of money in all the emerging markets. India was under-owned last year, so a lot of that money has flown back in. But with current account numbers as they are, it is healthy if we have a marginal rate of depreciation every year. When we don’t depreciate at all then we get a cumulative impact of what we got last year when the foreign investors did not like us.
This 5 rupee gain is perhaps a correction. Unless we fix the current account situation, we are going to have periodic bouts of rupee weakening. So, we are where we are and I think that the rupee should be in this range within 1.1.5 per cent for a while unless we either see absolute clarity on the fact that there are going to be sustained levels of capital flow or our current accounts are going to be improving month on month.