Probability of another 25 bps hike in April policy has gone up: Tanvee Gupta Jain

“If you look at the numbers, the Street was at 4.7, we were at 4.6, the number came at 4.4, but largely if I adjust for the revisions in the previous quarters the data was largely as expected,” says Tanvee Gupta Jain, UBS Securities India Pvt Ltd.

The government has revised both the FY21 and FY22 GDP numbers, what does this mean in the larger context?
I would say if you look at the last two years GDP growth, they have revised specifically the last year numbers from 8.7 to 9.1. They have also revised the FY21 GDP growth from minus 6.6 to minus 5.8. So if I look at across categories, it is looking like that the consumption categories barring hotels and restaurants were actually doing much better largely led by food and beverages and the health segment. So I would say this is a regular practice but definitely the numbers are telling us that the growth was not as affected or the decline was not as material as was early indicated. But again, it was revised estimate and then they come out with the second revised estimate and then they come out with the actual. So revisions in the past growth data is as expected. Not the case, when it came to the Q3 numbers, right. They were lower than expected despite a higher base of 9.1% in FY22. So just wanted to understand in context of that could we see the number further shrink in Q4 or do you think at 4.4 it is going to bottom out?
If you look at it on a seasonally adjusted sequential basis India’s real GDP actually contracted by 0.9% quarter-on-quarter in the December quarter after registering a growth of plus 4.5% quarter-on-quarter in the September quarter. So if you look at the numbers, the Street was at 4.7, we were at 4.6, the number came at 4.4, but largely if I adjust for the revisions in the previous quarters the data was largely as expected.

I agree with what the CSO is saying that they are still maintaining a 7% GDP growth for the full year that is FY23. The consequent March quarter data should be somewhere around 5.1.

So at that point at least for the FY23 I think it could be bottom. That said, for FY24, if you look at where we are standing specifically towards the next year, our GDP growth number is 5.5%. And the GDP specifically in the September and the December quarter could be in the 4% handle. So I am not sure at this point whether it is a bottom, whether Indian economy has already bottomed out because we really have to see how the global growth pans out, specifically in 2023 and what is the impact we are going to see of the tightening in global monetary landscape, which could be extended and longer than earlier anticipated.

I will throw more ingredients in the melting pot. IMD forecast for a tough winter ahead, it could be a tough monsoon ahead. RBI’s projections that inflation has not topped out and the latest inflation data globally is indicating that more rate hikes are coming. How should one bake these two events which at the beginning of the year perhaps were not up for consideration?
Absolutely. I think it is a very tough choice because at one end you are seeing that the growth momentum is slowing down and which is expected to remain likely in a scenario where the global headwinds are kind of quite material. And on the second hand, we are seeing that inflation numbers continue to remain sticky. I mean, if you look at the Jan inflation number, it was 6.5% YoY 50 bps above consensus. Core inflation remains sticky and elevated so definitely a tough choice. I would say from our analysis, we do see that the probability of another 25 bps hike in the April policy has gone up. In fact, we really very closely track what the US Fed is doing and our US team has now built in an additional 25 bps Fed fund rate hike in May with a meaningful risk of another one in June.

And at the same time, as I just highlighted that the El Nino weather conditions are something which we have to closely monitor because when we did our math a cumulative impact of an El Nino while it is not that material on the GDP growth perspective but on inflation there could be a 40 to 60 bps impact overall from a three to four quarter perspective, not only from the near term.

So at this point, I would say basically for the April policy review will look at two data points. One, the Fed inflation print and the second is the March outcome of the Fed policy before I form my view for the April policy.

One interesting thing because RBI keeps on talking about the real rate and you look at real rate at CPI minus one year, the interest rate minus one year forward CPI inflation and when I was doing my math it is right now 90 bps. Pre pandemic average was 200 bps and our estimate of a neutral interest rate, which they have come out in one of the recent paper is something about 80 to 100 bps.

And the last MPC minutes we saw Dr Patra actually mentioning that the policy rate has moved into restrictive territory which provides a headroom to continue to moderate the order of rate increases.

So I would say definitely a tough choice but RBI is definitely near the tail end of its rate hike cycle. It will be data dependent and not much support you are going to see on the growth momentum.

Let us look at the data for the quarter gone by, I am especially talking about the entire capex/ infrastructure data. One side capex has started, government is spending, states have the appetite and the hunger. I can see roads are getting constructed, buildings are getting built, the numbers which you got from Siemens or an ABB the capex in railways and defence how come that is not translating into the GDP growth?
Actually, if you look at the fixed capex growth I mean for the December quarter it was up 8.3%. Look at the last September quarter data it was up 9.7% so I would say fixed capex growth is actually showing up and has been largely supportive. That said as a different view that going forward even though government is boosting public capex but the private investments specifically when we call the corporate capex our view is that the a lot of firms could start postponing capex because of demand uncertainty and exports are already contracting and it will start showing up in the manufacturing data with a lag.

But as of now, I think whatever momentum you are seeing on fixed capex it is showing up in the data. But going forward, I think even that support is going to start waning off.

What is the outlook when it comes to inflation and that as a risk given the fact that you have the Reserve Bank not hiking correspondently in terms of rates, there could be a currency risk as well, is that a worry?
When I am looking at the numbers, my current account deficit which would have widened to 2.8% of GDP in FY23 is actually narrowing closer to 2 to 2.5% of GDP in FY24 because one the domestic demand trend is weakening. So that should provide some support on your non-oil non-gold demand.

So imports should come down and second we have taken oil assumption of $95 a barrel. So depending upon where oil prices eventually settle around that will also have a big bearing on my current account deficit projections. And what we have seen over the last two and a half months that every episode of dollar weakness was used by the RBI to add back to the FX reserves kitty. So FX Reserves have gone up from the bottom of $520 billion to as high as $565 billion as of now. So at this point, we are not that worried about the currency risk what we were maybe five months or six months earlier because of widening current account balance and a wider trade deficit.

I think a lot of concerns on external stability risk seems to be gradually coming under control. Obviously, there could be one off scenarios if the dollar index rises because Fed turns out to be more hawkish than expected and the dollar index continues to strengthen that could bring some depreciation concerns on currency.

But largely, we are not as worried about external stability risk at the moment. I think from a macro risk point of view, the biggest concerns seem to be on in the inflation bet.