We are looking at 6.9% GDP growth this year and 7.3% next year: Indranil Sengupta

In a chat with ET Now, Indranil Sengupta, BofA-ML, says every month of dislocation due to demonetisation impacts GDP by between 0.2% and 0.3% of GDP.

Edited excerpts:

How are you mapping all that talk about the growth trend from here on after what the CSO indicated in terms of a setback that growth is likely to see in FY17?

We are already looking at 6.9% this year and 7.3% next year. We believe there is further downside to the CSO’s numbers if you go by our own numbers. Every month of dislocation due to demonetisation impacts GDP by between 0.2% and 0.3% of GDP.

Do you think in the current environment where we are looking at positioning towards tightening of monetary policy globally, starting with US, what happens India? Any plan of a push by the Indian central bank to give a leg up to growth via cutting rates may come under bit of a cloud. The central bank may not be able to cut rates as much as anticipated earlier?

Most certainly not. The US is going from 0.5% to may be 1% one quarter. We are at six quarters. So there is a huge elbow room for the Indian central bank, the RBI, to cut rates. That is number one.

Number two, when you cut rates, you strengthen the currency by attracting FII equity flows because in India, the FII equity portfolio is almost five to six times that of the bond market portfolio. From that perspective as well, we do not see any constraint for the RBI to cut rates. Given that inflation remains benign, we are looking at 25 bps cuts by the RBI in February and April as several high frequency indicators suggest that there are downside risks to growth. The CSO itself suggests there are downside risks to growth. So from that perspective, we think that the RBI will cut rates both in February and in April.

Wanted to just talk a little bit about expectations from the budget because a lot of corporates that we have been talking with at least a few months ago were acknowledging the fact that the on ground situation had not dramatically altered and very interesting there was Twitter poll by the finance ministry inviting suggestions on which sector needs most focus and it was agri sector that got the number one preference followed by manufacturing and even infrastructure. What exactly would be your wish list from the budget and which sector would you hope gets the most preference?

We are looking at fiscal deficit of 3.5% of GDP translating into net borrowing of around Rs 5000 billion in central government paper. That is number one. We think that demonetisation will net about Rs 1500 billion to the government inclusive of special RBI dividend. All put together, I think the government will probably focus on rural spend but they will also have to pay the pay commission as part of the arrears for allowances. They will also have to recapitalise PSU banks. So these will be the three focus areas for the government in the budget.

What did you make of the tax mop-up details that came out yesterday. So you think that the government has in a meaningful manner been able to assuage concerns about the impact of demonetisation? Do you think the signal has been sent out that on the fiscal side the government is trying to balance things out?

We think that the government should be able to meet its 3.5% of GDP target for this year and N K Singh committee will probably recommend a higher band. We also expect a 3.5% fiscal deficit target next year. The fiscal deficit is not a concern either which way at this point given that it is fairly low.

What would be a concern for you right now? There are downside risks to growth but for the world watching India and when we talk to a lot of foreign investors, they are saying that as long as 7% is maintained on the growth frontline, your projection is a little lower than that. When compared to the rest of the world, things are still looking okay what is your top concern stepping into the budget and post that in terms of what policy can do to support growth? We have not quite seen the kind of pick up in investments that one was expected to this year?

My concern remains what for the last three years, with extremely high real lending rates. GDP growth may be 7% in the new series but it is probably somewhere around 4% to 4.5% in the old series. We think that the big principal measure for recovery that the government and the RBI need to take is to bring down lending rates

A step has been taken with the reductions in the MCLR but that is only the beginning.What is required is a fall in the effective lending rate, not just the marginal one which is why we think there will be a mix of RBI rate cuts and RBI OMO to coax down lending rates. Until that happens, year after year we will keep on waiting for the capex cycle to revive which will never happen.

The rupee is sitting at 68 but still on a relative basis, looking far more resilient than other emerging market currencies despite the dollar’s unprecedented move. What is the call on the rupee right now and from a near term perspective?

Typically the rupee appreciates a bit into March because of strong seasonality. Thereafter, given that we expect the dollar to go to 102 a euro, the rupee will probably end 2017 at around 70. But right now the rupee is going to ride a strong seasonality in February and March.