Where is Indian Economy Headed?(as of 25/8/14)

Q & A with Kartik Goyal of Bloomberg

Q1: How do you assess India's current economic situation? With CPI inflation still holding uncomfortably high and growth still near a decade low?

A1: The recovery is firming up and we are on track for a 1% point step up in the GDP growth rate, that I predicted on New Years eve. Inflation is also on a clear but gradual downtrend, though some upticks can arise from the poor monsoon.

Q2: What's your outlook on the U.S. Federal Reserve raising interest rates and its impact on India? How well prepared India is to face that and What can it do more to shield itself from the impact of higher US rates?

A2: As I expect US recovery to be a gradual one, my expectation of the Feds monetary policy is a gradual winding down of QE and a corresponding rise in interest rates. There will be some negative effect on capital inflows into India, but I expect this to be temporary and short lived.

Q3: Do you think the RBI's current stance, of maintaining high interest rates even as inflation has come down a bit and the rupee is stable, is aimed at protecting the rupee when the US Federal Reserve starts raising interest rates?

A3: No. The RBIs stance is clearly directed at inflation expectations. In my personal view the inflation expectations as measured by the available survey are a very poor substitute for the inflation expectation expectations that would be reflected in a well functioning market for inflation indexed bonds. In my view the former are way out of line. Any RBI action to reduce rupee volatility will occour at the time of instability.

Q4: How do you see the current monsoon deficit and its impact on inflation? And, how will monsoon, high CPI inflation will impact the RBI's monetary policy and the currency policy?

A4: Any impact of weak monsoon on cereals can easily be managed by the massive stocks with FCI. However, there is a possibility of some regional crop losses and a spike in thier prices. This will merely slow the decline in inflation without breaching the 8% CPI inflation target.

Q5: Do you think that the RBI is done with the rate tightening cycle? and the future moves will be towards easing the rates? What do you think will guide the RBI's monetary policy stance?

A5: Depends on inflation expectations and actual inflation projections.

Q6: What's your outlook for the economic growth? Do you have growth estimate for Fy15 and Fy16? How do you think the recent election mandate will impact the economic growth in the coming years?

A6: In my comments on Mr Jaitlely's first budget, I had reiterated that GDP growth in 2014-15 would accelerate by 1 per cent from last year (i.e 5.6-5.7%) and could go up another per cent point in 2015-16(ie 6.5 - 6.7%) if the policy actions hinted at in the budget fructify

Q7: What's your outlook for the rupee? Where do you see the rupee by the end of December? Do you see it touching 70 against the dollar? Or it gaining or remaining stable and why?

Q8: What do you think are the biggest risks to the rupee? Do you think the Indian rupee is overvalued given inflation differentials with other rnations? What are the risks to the rupee if the US Fed starts raising rates?

Q9: What's your view on the RBI's currency policy? And what it can do more to shield the rupee?

A7-9: The rupee is currently fairly valued at around R60/$. I expect the rupee to remain within a band of +/- Rs 2/$  of this.

 

Q10: Dr Rajan in his speeches talked about how the world is heading towards another crisis as the different central banks move in different directions to protect their economies. What's your view on that? And, what can India do to protect itself from the global monetary policy breakdown?

A10:  I am not sure I agree with the timing of his remarks, so I don't think there is an immediate danger to India. But in several speeches in the IMF board in 2011-2012 I had warned about a Japanese style "lost decade for the Euro Area/EU" and a slow recovery for the US given the policy mistakes they made in 2009-2010 (to which I had been drawing attention since 2010 during their article IV discusssions).