Never seen the RBI this pro-growth and this relaxed about outlook: Taimur Baig, Deutsche Bank

In a chat with ET Now, Taimur Baig, Chief Economist, Deutsche Bank, says the market rally that we have seen in the last couple of months has been unsupported by fundamentals

ET Now: What did you make of the policy statement and the consistent focus on liquidity that the RBI give?

Taimur Baig: It was great. I am baffled by the markets' negative reaction but let us attribute all of that to global data because it has been a very long time since the RBI has been discomfortable in signalling its intentions and providing guidance. This is a central bank that is no longer looking at the banking system in an adversarial manner where it conducts monetary policy with the deficit as a default for liquidity. This is a big departure, it is a regime change let us say from the middle of the Subbarao era to now towards the end of the Rajan era. We have never seen the RBI this pro-growth and this relaxed about the outlook. Inflation we can discuss. Upside downside risks, near term liquidity issues, have always been there around January-February of the year, but RBI is now looking way beyond all that and talking about supporting growth through structural improvement in the liquidity. I am convinced that this will have transmission and will reduce the liquidity turned premium and there will be some better than before transmission of monetary policy given all that happen yesterday.

ET Now: If Reserve Bank of India is so comfortable with the global setting and with the macro picture or macro positioning of India, what prevented the Governor from going ahead with the 50 bps cut? Whether it is 25 or 50 and the effect of that can be debated but some would argue that given the way the Indian economy is in a sweet spot, 50 bps rate cut would have been a welcome move?

Taimur Baig: Well the sweet spot issue is a bit of a controversy because on one hand we have the national account saying that India is the fastest growing economy in the world and on the other hand, we have negative IP, negative exports, major problems with the banking system and still fairly weak demand environment. So there is a tension in RBI’s policy communication as well. It cannot disregard national accounts data, it needs to be dovish given everything else looks bad but at the same time it got to be oblivious of the fact that from the GDP perspective, we do not need any monetary support whatsoever. So you have to look at a tricky balancing game as to how you transmit that issue. If you look at the forecast yesterday, they had a fan chart of inflation, a fan chart of growth. You can see that the RBI really has no conviction on that. I would say RBI does not really know where growth is anymore because if you ask the central bank where is the output gap, the 7.5 there probably is not that much of an output gap. On the other hand, capacity utilisation and key industries are no more than 65-70 per cent. So we have a problem of looking at the data and interpreting it for policy.

What prevented him from going for a 50 bps cut is one issue. The second issue is that the key objective of the central bank is inflation targeting and the 5 per cent forecast that they have for FY17 or the 4.2 per cent forecast they have for FY18. It is fair to say ignore the impact of the Seventh Wage Commission because the central bank does not know when it will be fully implemented or at all and how it will impact inflation. That is a mechanical exercise but nothing beyond that. So that is one source of uncertainty and the second is commodities which have bottomed out. We saw diesel prices going up in India yesterday. We are seeing petrol prices go up recently. So these big large negative year on year contribution to inflation or drag or subtraction from inflation has gone. So, one has has to be a bit careful about where it takes the monetary policy given that it is not only thinking about inflation this year but also inflation next year.

ET Now: You have 150 bps of rate cut that the RBI has given out over the course of the last 18 months and a host of liquidity infusing measures. Yes, there is a fair amount of optimism that credit growth on the retail side may pick up. When would one see clear signs of demand coming in on the investment side?



Taimur Baig: CMI published their Q1 data or January-March data earlier this week and they have this one survey which I thought was extremely revealing; two-three years ago, if you ask Indian businesses what was preventing them for investing, they would have talked about the usual list -- delay in project clearance, environmental issues, an adversarial situation with respect to the supply of raw materials irrespective of whether it is power or coal. All these complaints are gone and if you see the survey of this quarter, these are now making up no more than 15-16 per cent of the explanation behind the stalled projects. The stalled projects have not gone down why because there is huge amount of pick up in overall macro uncertainty and lack of interest from promoters. This tells you how difficult it is to turn the cycle around. There would be some structural improvement in the economy no doubt but globally it is a tough place to do business. There are not that many areas with scope of huge amount of growth going forward and that translates into a sort of downbeat sentiment even at the local level.

So unless the global macro improves, I simply cannot see India launching a major recovery. It is doing probably the best it can under circumstances. Going forward, perhaps cleaning up the banks will help. More privatisation would also help but we should be very careful in our expectation. It is a very challenging time and going beyond 7.5 per cent growth is going to be pretty tough.

ET Now: The three Cs have haunted us for the better part of this year -- China, currency and commodity. What are the chances that the three Cs will haunt us again? For the moment it looks like the worst is behind us but never say never in financial markets?

Taimur Baig: No. We published a piece last Friday showing that the market rally that we have seen in the last couple of months has been unsupported by fundamentals. There has not been any major fundamental improvement whether it is in China or Brazil or India for that matter and given the margin you can pick up a few things here and there but broadly speaking emerging markets economies are growing about a standard deviation below their long term trend. This is a major headwind. Whether you are talking about valuations of stocks or ROEs from a private equity investment point, the expectations are going to be down given this significant below trend growth that we are seeing year after year.

Now, regarding the three Cs that you have mentioned and commodities, there is a very firm ceiling. There is a lot of stuff happening on the supply side and very little happening on the demand side to suggest that there can be a major rebound in commodities. So beyond oil at $40-$60, I cannot see anything for the foreseeable future. As far as currencies are concerned, there has been very substantial adjustment all over the EM. It is reasonable to say that there is no major case of currency misalignment anywhere in the emerging markets and that is one area the correction has been done and over with. There are no major shorts out or major longs are there either but fairly neutral as far as currency is concerned. China has its work cut out and it still has not managed to get a hold of the problems in its banking system, corporate leverage and so on. But it seems that the sort of communication errors that they had made last year -- whether with respect to the exchange rate issue or the equity market issue -- they are trying very hard to not step on those pitfalls again and communicate in a more cohesive manner. This should help the market but I am not holding my breath or great data coming out of China either.