ET NowIn a chat with ET Now, Madan Sabnavis, Chief Economist, CARE Ratings, shares his macroeconomic outlook. Excerpts:
ET Now: People have been talking about the possible impacts of a US rate hike on India. From the minutes, it seems that the Fed will take its time before it actually goes ahead and hikes rates. Your take?
Madan Sabnavis: In terms of its influence on India, the Fed's rate stance will be important. But it has been taken for granted that the Fed will hike rates during the course of 2015, though the timing is still uncertain. So, this expectation has been already factored in all calculations by the markets.
Therefore, a rate hike by the US will not have any overbearing influence on Indian economy and markets. The India story will continue to be influenced primarily by domestic factors and the government's policy decisions.
ET Now: Can you specifically name these domestic factors? At the moment inflation is on our side, but the IIP has not revived. So FM Jaitley is stuck between a rock and hard place. How do you view this situation?
Madan Sabnavis: We have to split the domestic factors in two categories — those influenced by the Finance Ministry, and the ones under the control of the RBI. The Finance Ministry and the RBI would be looking at different sets of factors.
The RBI would be primarily looking at inflation numbers. It will be keeping a watch on what the government does in the budget. Only after that it might go in for a further rate action.
On the other hand, the government will be concentrating on presenting a better-quality budget. They will try to come out with better fiscal and revenue deficit numbers, and a better borrowing and expenditure programme.
ET Now: What are you expecting in terms of GDP growth targets for the next year?
Madan Sabnavis: It would be quite interesting to see what kind of growth FM Jaitley targets. Historically we have seen that the government looks at a nominal GDP growth rate in the region of 13-13.5%.
This is what the government normally does when it comes to revenue expectations. We have seen that the new series creates a lot of confusion in terms of real GDP growth.
While balancing with the numbers for indicator like exports, credit growth and industrial growth, the nominal GDP growth has to remain more or less range-bound within what was the old series. So, it won't be much of a comfort for the government when they try to plan their fiscal deficit number, because even at a ratio of 3.6% they may still have to go long with the old GDP number as the denominator.
I am quite sure that this time they are going to look at a number of over 8% in real GDP, and in case you are looking at a number of more than 8%, it means that your inflation numbers would be substantially lower.
ET Now: The rupee has been defending 62. What is the outlook for the currency?
Madan Sabnavis: We have to look at two factors. One, what the Fed does in terms of the timing of hiking the rates. Second, the quantitative easing, which is going on in the euro zone. The QE is going to continue to drive funds into emerging markets.
So, indications are that continued FII inflow is going to provide a lot of support to the rupee.
What happens to the price of oil will also determine in a big way what happens to the rupee. Presently, we are looking at a number moving towards the 60-mark. In that case, our trade deficit could be slightly under pressure compared to what it was in the last couple of months.
But we will definitely be better off than what we were in 2013-14. The exchange rate should remain in the region of 62, maybe 61-62, in case these flows continue the way we expect them to.
ET Now: Are we underestimating the importance of US Fed? It could be a quarter or two before they move, but when they finally do, globally everything will move?
Madan Sabnavis: Yes, it will be. But at the moment the market has already priced in the rate hike. So, the impact will be less severe than what it would have been in case it came out as a surprise.
Now the only surprise element would be the timing of it. Earlier we felt it would come probably in June 2015. Now there is talk that it could happen in September or October, depending on how the quarterly growth rates behave in the US.
But all signs point to the fact that the US is definitely in a better place than they were last year. That itself could be a good enough reason to expect the rate hike a bit earlier.
So, I still think it would happen in the second half of 2015 rather than in 2016.
ET Now: People have been talking about the possible impacts of a US rate hike on India. From the minutes, it seems that the Fed will take its time before it actually goes ahead and hikes rates. Your take?
Madan Sabnavis: In terms of its influence on India, the Fed's rate stance will be important. But it has been taken for granted that the Fed will hike rates during the course of 2015, though the timing is still uncertain. So, this expectation has been already factored in all calculations by the markets.
Therefore, a rate hike by the US will not have any overbearing influence on Indian economy and markets. The India story will continue to be influenced primarily by domestic factors and the government's policy decisions.
ET Now: Can you specifically name these domestic factors? At the moment inflation is on our side, but the IIP has not revived. So FM Jaitley is stuck between a rock and hard place. How do you view this situation?
Madan Sabnavis: We have to split the domestic factors in two categories — those influenced by the Finance Ministry, and the ones under the control of the RBI. The Finance Ministry and the RBI would be looking at different sets of factors.
The RBI would be primarily looking at inflation numbers. It will be keeping a watch on what the government does in the budget. Only after that it might go in for a further rate action.
On the other hand, the government will be concentrating on presenting a better-quality budget. They will try to come out with better fiscal and revenue deficit numbers, and a better borrowing and expenditure programme.
ET Now: What are you expecting in terms of GDP growth targets for the next year?
Madan Sabnavis: It would be quite interesting to see what kind of growth FM Jaitley targets. Historically we have seen that the government looks at a nominal GDP growth rate in the region of 13-13.5%.
This is what the government normally does when it comes to revenue expectations. We have seen that the new series creates a lot of confusion in terms of real GDP growth.
While balancing with the numbers for indicator like exports, credit growth and industrial growth, the nominal GDP growth has to remain more or less range-bound within what was the old series. So, it won't be much of a comfort for the government when they try to plan their fiscal deficit number, because even at a ratio of 3.6% they may still have to go long with the old GDP number as the denominator.
I am quite sure that this time they are going to look at a number of over 8% in real GDP, and in case you are looking at a number of more than 8%, it means that your inflation numbers would be substantially lower.
ET Now: The rupee has been defending 62. What is the outlook for the currency?
Madan Sabnavis: We have to look at two factors. One, what the Fed does in terms of the timing of hiking the rates. Second, the quantitative easing, which is going on in the euro zone. The QE is going to continue to drive funds into emerging markets.
So, indications are that continued FII inflow is going to provide a lot of support to the rupee.
What happens to the price of oil will also determine in a big way what happens to the rupee. Presently, we are looking at a number moving towards the 60-mark. In that case, our trade deficit could be slightly under pressure compared to what it was in the last couple of months.
But we will definitely be better off than what we were in 2013-14. The exchange rate should remain in the region of 62, maybe 61-62, in case these flows continue the way we expect them to.
Madan Sabnavis: Yes, it will be. But at the moment the market has already priced in the rate hike. So, the impact will be less severe than what it would have been in case it came out as a surprise.
Now the only surprise element would be the timing of it. Earlier we felt it would come probably in June 2015. Now there is talk that it could happen in September or October, depending on how the quarterly growth rates behave in the US.
But all signs point to the fact that the US is definitely in a better place than they were last year. That itself could be a good enough reason to expect the rate hike a bit earlier.
So, I still think it would happen in the second half of 2015 rather than in 2016.
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