In an interview with CNBC-TV18, Santanu Sengupta, India Economist at Goldman Sachs, affirmed that inflation is expected to remain within the target band.
He also reiterated Goldman Sachs' confidence in the Indian rupee.
The Reserve Bank of India (RBI) opted to keep interest rates unchanged and provided no indication of the timing for a rate cut.
The upward revision of the growth forecast may suggest that a rate cut isn't necessary due to robust economic growth. However, the RBI highlighted during the press conference that it would unveil its perspective on the 'neutral rate' in the upcoming RBI bulletin.
But what exactly is the neutral rate?
It represents the optimal disparity between the nominal interest rate and inflation.
With the current repo rate at 6.5% and a forecasted consumer price index (CPI) of 4.5% for the year, the real rate differential stands at 200 basis points (bps).
However, if the RBI views the neutral rate as 150 bps, anticipation of a rate cut in the near future would rise.
Therefore, the forthcoming RBI bulletin assumes heightened significance, potentially surpassing even the Monetary Policy Committee (MPC) deliberations.
Below is the verbatim transcript of the interview.
Q: What is your best estimate regarding the rate cut?
A: Our assessment places the neutral rate for India around 6%, translating to a real neutral rate of approximately 150 bps. This exceeds the historical range of 80 to 100 bps. Consequently, we anticipate that the extent of rate cuts in India will be contingent upon the neutral rate, which we believe will be around 50 bps. The timing of the RBI's rate cut remains uncertain as robust economic growth persists, coupled with the persistent trajectory of food inflation.
Some members of the RBI MPC may exhibit reluctance to pivot immediately. However, our projection suggests a rate cut in Q4 of this calendar year, with the October or December meeting being probable. We lean slightly towards the December meeting, contingent upon contained food inflation by then and a less formidable sequential momentum in core inflation during the latter half of the year.
Q: Let's delve into the rates position and fiscal implications momentarily. Another significant announcement from the RBI was the upward revision of the gross domestic product (GDP) forecast for the current year. Have you adjusted your growth forecast post the RBI announcement or due to any shifts in government dynamics since your initial projection on 31?
A: We forecast a 6.8% growth for FY25, slightly higher for the calendar year, whereas lower for the fiscal year due to the exceptionally high preceding quarter. Regarding cyclical growth outlook, we perceive the risks to be balanced. There's no substantial upside risk to our growth forecast, especially considering our inclusion of fiscal consolidation measures. Despite the election outcome, we anticipate fiscal consolidation towards 5.1% of GDP, potentially edging closer to 5%. If monetary policy maintains its tightening stance until October or December this year, and given the lag effect of monetary policy, there's unlikely to be a significant cyclical boost from the policy front to elevate growth forecasts.
Also Read | RBI extends restrictions on National Mercantile Co-operative Bank until September 2024
Q: But let me just push you a little bit on that. Some have read the election verdict as an indication that several pockets are dissatisfied that the K-shaped recovery has hurt large segments, which is why you saw in Uttar Pradesh, Rajasthan, Haryana the ruling party performing badly. So would you expect a higher minimum support price (MSP) or some other kind of largesse which may disturb the fiscal numbers, but which will be positive for growth as well?
A: From the macro perspective, the aggregate fiscal impulse is what matters and within that, what is the mix of consumption versus, let's say, investment. So we think that the aggregate fiscal consolidation towards 5-5.1% of GDP remains intact, especially now that you have the buffer of about 30 bps from the incremental dividend from the RBI. Now, could there be a switch towards more welfare spending as you head into the second half of the year? That's possible, given some of the election - how you interpret the election outcomes. But that necessarily would not be incrementally positive for growth, because the aggregate fiscal impulse still for us would remain intact because you will have to shave from somewhere else to provide the fillip here.
Also Read | Govt concerned about availability of channa, tur dal, potatoes, onions and edible oil, PMO monitoring prices
I think the outside risk is coming from a capex cycle if it really picks up much faster than what you're anticipating.
Q: I wanted to get your view as well on the US non-farm payrolls, indicating that the Fed perhaps is not cutting any time soon, as the yields have risen, I don't know if you are the point person to tell us what Goldman Sachs’ view on yields in India, will it be like continue to be between 6.95 and 7.1, what is your yield expectation average for the year and rupee more importantly?
A: We do not put out forecasts on the 10-year benchmark bond in India, but what we like because of our view on monetary policy and we are baking in rate cuts in the later half of this year is we like the short end of the curve. So we have a standard recommendation on a long two-year IGB. And the main reason is because the curve, if you see it in India, is now really flat. And if you think that the neutral rate in India is around 6%, so the RBI can ease up to about 50 basis points, which is our view, then the short end at some point in time is what we think will rally more than duration. And therefore we like to be on the short end.
Also, Read | RBI unmoved on rates; gung-ho on growth
On the rupee, even with the election outcome, etc, we don't think that with the reduced majority, the macro stability, which India has earned in a hard way over the last five or seven years, is going away. We still think that the current account deficit (CAD) will be narrow. We still think that the fiscal consolidation will be maintained and inflation will remain within the target band of the RBI.
And therefore, we continue to like the rupee as a low-ball carry currency. We have a short euro in our trade recommendation.
For more, watch the accompanying video
He also reiterated Goldman Sachs' confidence in the Indian rupee.
The Reserve Bank of India (RBI) opted to keep interest rates unchanged and provided no indication of the timing for a rate cut.
The upward revision of the growth forecast may suggest that a rate cut isn't necessary due to robust economic growth. However, the RBI highlighted during the press conference that it would unveil its perspective on the 'neutral rate' in the upcoming RBI bulletin.
But what exactly is the neutral rate?
It represents the optimal disparity between the nominal interest rate and inflation.
With the current repo rate at 6.5% and a forecasted consumer price index (CPI) of 4.5% for the year, the real rate differential stands at 200 basis points (bps).
However, if the RBI views the neutral rate as 150 bps, anticipation of a rate cut in the near future would rise.
Therefore, the forthcoming RBI bulletin assumes heightened significance, potentially surpassing even the Monetary Policy Committee (MPC) deliberations.
Below is the verbatim transcript of the interview.
Q: What is your best estimate regarding the rate cut?
A: Our assessment places the neutral rate for India around 6%, translating to a real neutral rate of approximately 150 bps. This exceeds the historical range of 80 to 100 bps. Consequently, we anticipate that the extent of rate cuts in India will be contingent upon the neutral rate, which we believe will be around 50 bps. The timing of the RBI's rate cut remains uncertain as robust economic growth persists, coupled with the persistent trajectory of food inflation.
Some members of the RBI MPC may exhibit reluctance to pivot immediately. However, our projection suggests a rate cut in Q4 of this calendar year, with the October or December meeting being probable. We lean slightly towards the December meeting, contingent upon contained food inflation by then and a less formidable sequential momentum in core inflation during the latter half of the year.
Q: Let's delve into the rates position and fiscal implications momentarily. Another significant announcement from the RBI was the upward revision of the gross domestic product (GDP) forecast for the current year. Have you adjusted your growth forecast post the RBI announcement or due to any shifts in government dynamics since your initial projection on 31?
A: We forecast a 6.8% growth for FY25, slightly higher for the calendar year, whereas lower for the fiscal year due to the exceptionally high preceding quarter. Regarding cyclical growth outlook, we perceive the risks to be balanced. There's no substantial upside risk to our growth forecast, especially considering our inclusion of fiscal consolidation measures. Despite the election outcome, we anticipate fiscal consolidation towards 5.1% of GDP, potentially edging closer to 5%. If monetary policy maintains its tightening stance until October or December this year, and given the lag effect of monetary policy, there's unlikely to be a significant cyclical boost from the policy front to elevate growth forecasts.
Also Read | RBI extends restrictions on National Mercantile Co-operative Bank until September 2024
Q: But let me just push you a little bit on that. Some have read the election verdict as an indication that several pockets are dissatisfied that the K-shaped recovery has hurt large segments, which is why you saw in Uttar Pradesh, Rajasthan, Haryana the ruling party performing badly. So would you expect a higher minimum support price (MSP) or some other kind of largesse which may disturb the fiscal numbers, but which will be positive for growth as well?
A: From the macro perspective, the aggregate fiscal impulse is what matters and within that, what is the mix of consumption versus, let's say, investment. So we think that the aggregate fiscal consolidation towards 5-5.1% of GDP remains intact, especially now that you have the buffer of about 30 bps from the incremental dividend from the RBI. Now, could there be a switch towards more welfare spending as you head into the second half of the year? That's possible, given some of the election - how you interpret the election outcomes. But that necessarily would not be incrementally positive for growth, because the aggregate fiscal impulse still for us would remain intact because you will have to shave from somewhere else to provide the fillip here.
Also Read | Govt concerned about availability of channa, tur dal, potatoes, onions and edible oil, PMO monitoring prices
I think the outside risk is coming from a capex cycle if it really picks up much faster than what you're anticipating.
Q: I wanted to get your view as well on the US non-farm payrolls, indicating that the Fed perhaps is not cutting any time soon, as the yields have risen, I don't know if you are the point person to tell us what Goldman Sachs’ view on yields in India, will it be like continue to be between 6.95 and 7.1, what is your yield expectation average for the year and rupee more importantly?
A: We do not put out forecasts on the 10-year benchmark bond in India, but what we like because of our view on monetary policy and we are baking in rate cuts in the later half of this year is we like the short end of the curve. So we have a standard recommendation on a long two-year IGB. And the main reason is because the curve, if you see it in India, is now really flat. And if you think that the neutral rate in India is around 6%, so the RBI can ease up to about 50 basis points, which is our view, then the short end at some point in time is what we think will rally more than duration. And therefore we like to be on the short end.
Also, Read | RBI unmoved on rates; gung-ho on growth
On the rupee, even with the election outcome, etc, we don't think that with the reduced majority, the macro stability, which India has earned in a hard way over the last five or seven years, is going away. We still think that the current account deficit (CAD) will be narrow. We still think that the fiscal consolidation will be maintained and inflation will remain within the target band of the RBI.
And therefore, we continue to like the rupee as a low-ball carry currency. We have a short euro in our trade recommendation.
For more, watch the accompanying video
(Edited by : Hormaz Fatakia)
First Published: Jun 10, 2024 6:16 PM IST
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