Don't see RBI cutting rates in January: Goldman Sachs
Tushar Poddar, Asia Economics Research, Goldman Sachs in an interview to CNBC-TV18 said that overall inflationary pressures in India may be contained. He expects aggregate demand growth to moderate and sees inflation in the band of 4-4.5% in 2008. He believes appreciation of rupee will take sting out of inflation. He said a 10% hike in fuel price will boost inflation by 0.6% over 12 months.
He further added they do not expect RBI to cut rates in January. RBI may cut rates in second half of 2008. He expects Indian GDP growth rate of 8% for 2008.
He, however, is bearish on the US economy at this point. He said they are forecasting below-trend growth for US in 2008. Poddar added housing prices in US have not bottomed, which will impact credit conditions. Food prices and likely fuel price hike will pose inflationary risks. He also said tightening of Chinese credit is negative for global sentiment.
Excerpts from CNBC-TV18’s exclusive interview with Tushar Poddar:
Q: You have done some number crunching on how 2008 will pan out, in terms of inflation levels, for the Indian economy. What are your findings?
A: We have built a model, which explains inflation in India, in 2008. There are several pressures on the inflationary front; food prices are on the rise and international oil prices are elevated. There are some pressures on the fiscal as well as money growth.
But on the whole, what we have come up with shows that inflationary pressures are going to be contained. That is primarily because aggregate demand or growth is expected to moderate in 2008. We find that as a dominant influence on inflation.
Added to that, some exchange rate appreciation is going to take some steam off inflation, as well as the reluctance by the authorities to pass on any fuel price increase. We are looking at a band of 4-4.5% inflation for 2008. In our view, that is going to allow some easing of monetary policy towards the second half of 2008.
Q: You are not expecting any rate cuts in the first half of 2008?
A: That is right. We are definitely not expecting a rate cut in the January meeting of the Reserve Bank. The RBI has taken a hawkish stance and for good reason. Money growth is at a multi-year high and there are pressures due to fuel prices.
So, it is good to be cautionary at this stage. We are waiting for a signal from the RBI, to turn towards a more neutral stance, before it can start cutting rates.
Q: What is your sense on how the US markets are playing out and the data that is coming out there? Do you have a view on how that economy is shaping up and what the Fed may do from hereon?
A: We have come out with several reports on the US, where we have forecast a below trend growth in the US in 2008. In fact, we are well below the street on the US, because we think that the housing crises has not bottomed out yet. This is going to have an impact on credit conditions, not only in terms of the subprime, but also in general credit conditions.
If one looks at housing stocks, they have come off quite a bit. Single-family housing stocks have declined 54% over the last two years, which is the biggest drop in early 1980. So, we are still little bearish on the US economy at this stage, given that the housing market has a lot more to correct.
Q: Your December 17 report speaks about the tightening of credit in China. What are your forecasts of what can happen? What is the impact on other Asian economies, notably India, because of this credit tightening that you are expecting and seeing in China?
A: Look at it in context. The tightening in credit comes at a time when generally conditions for credit are tight globally. This is especially in the US, as well as Europe. We saw the concerted attempt by the banks, Federal Reserve and the ECB yesterday, to inject liquidity in a market that has become very tight.
In that context, the credit tightening in China comes when the rest of the world is already going through a tightening phase. So, this adds a negative element on top of that and that is why we think that at the margin, this is going to affect Asia as well.
We have put out some research that says that thus far, equity markets in Asia have not really factored in the entire magnitude of credit tightening in China. But we are seeing more traction to that view this week. So, I think the credit tightening in China is a significant event, because it comes at a time when the rest of the world is already pretty tight.
Q: With the US economy expected to slowdown, according to your forecasts, as well as the Chinese economy, what are your GDP forecasts for India for 2008?
A: We have to face cyclical headwinds as well in India. We have a high interest rate scenario and an appreciating currency. We have oil prices that are pretty high and we have external demand, which is slowing, in US, China and so on.
So, we are definitely expecting some moderation in growth, going forward. It is not going to tank. We think that the structural factors, that are driving growth, are still pretty strong. So, we are expecting growth at about 8% for 2008. This is a comedown from 8.7% for FY08, that is ’07-‘08. But in a global economy, where growth is in short supply, I think 8% is still pretty good.
Q: What is happening on the oil front? We had news coming in that the government may look at a fuel price revision. In your estimate, if the fuel price was to be hiked by 5-10%, what sort of an impact would it have on inflation? By how much should fuel prices go up, to wipe out the under-recoveries, that oil marketing companies are currently facing?
A: Our estimate to wipe out the under-recoveries is about 20% increase in domestic fuel prices. This comes from our energy team. Our internal assessment shows that if a fuel price increase were to come about, let us say about 10% increase in fuel prices, that would give a kick to inflation of about 0.6 percentage points over 12 months.
Now, the maximum impact would come over 4 months. So, if the government were to announce a fuel price increase tomorrow, that impact is going to show up towards March or April 2008. But that is going to kick up the WPI by 0.6%. So, it is not insignificant, but we are not expecting the government to pass through all of the international prices at one go. That is the extent and the magnitude of the impact on inflation.
He further added they do not expect RBI to cut rates in January. RBI may cut rates in second half of 2008. He expects Indian GDP growth rate of 8% for 2008.
He, however, is bearish on the US economy at this point. He said they are forecasting below-trend growth for US in 2008. Poddar added housing prices in US have not bottomed, which will impact credit conditions. Food prices and likely fuel price hike will pose inflationary risks. He also said tightening of Chinese credit is negative for global sentiment.
Excerpts from CNBC-TV18’s exclusive interview with Tushar Poddar:
Q: You have done some number crunching on how 2008 will pan out, in terms of inflation levels, for the Indian economy. What are your findings?
A: We have built a model, which explains inflation in India, in 2008. There are several pressures on the inflationary front; food prices are on the rise and international oil prices are elevated. There are some pressures on the fiscal as well as money growth.
But on the whole, what we have come up with shows that inflationary pressures are going to be contained. That is primarily because aggregate demand or growth is expected to moderate in 2008. We find that as a dominant influence on inflation.
Added to that, some exchange rate appreciation is going to take some steam off inflation, as well as the reluctance by the authorities to pass on any fuel price increase. We are looking at a band of 4-4.5% inflation for 2008. In our view, that is going to allow some easing of monetary policy towards the second half of 2008.
Q: You are not expecting any rate cuts in the first half of 2008?
A: That is right. We are definitely not expecting a rate cut in the January meeting of the Reserve Bank. The RBI has taken a hawkish stance and for good reason. Money growth is at a multi-year high and there are pressures due to fuel prices.
So, it is good to be cautionary at this stage. We are waiting for a signal from the RBI, to turn towards a more neutral stance, before it can start cutting rates.
Q: What is your sense on how the US markets are playing out and the data that is coming out there? Do you have a view on how that economy is shaping up and what the Fed may do from hereon?
A: We have come out with several reports on the US, where we have forecast a below trend growth in the US in 2008. In fact, we are well below the street on the US, because we think that the housing crises has not bottomed out yet. This is going to have an impact on credit conditions, not only in terms of the subprime, but also in general credit conditions.
If one looks at housing stocks, they have come off quite a bit. Single-family housing stocks have declined 54% over the last two years, which is the biggest drop in early 1980. So, we are still little bearish on the US economy at this stage, given that the housing market has a lot more to correct.
Q: Your December 17 report speaks about the tightening of credit in China. What are your forecasts of what can happen? What is the impact on other Asian economies, notably India, because of this credit tightening that you are expecting and seeing in China?
A: Look at it in context. The tightening in credit comes at a time when generally conditions for credit are tight globally. This is especially in the US, as well as Europe. We saw the concerted attempt by the banks, Federal Reserve and the ECB yesterday, to inject liquidity in a market that has become very tight.
In that context, the credit tightening in China comes when the rest of the world is already going through a tightening phase. So, this adds a negative element on top of that and that is why we think that at the margin, this is going to affect Asia as well.
We have put out some research that says that thus far, equity markets in Asia have not really factored in the entire magnitude of credit tightening in China. But we are seeing more traction to that view this week. So, I think the credit tightening in China is a significant event, because it comes at a time when the rest of the world is already pretty tight.
Q: With the US economy expected to slowdown, according to your forecasts, as well as the Chinese economy, what are your GDP forecasts for India for 2008?
A: We have to face cyclical headwinds as well in India. We have a high interest rate scenario and an appreciating currency. We have oil prices that are pretty high and we have external demand, which is slowing, in US, China and so on.
So, we are definitely expecting some moderation in growth, going forward. It is not going to tank. We think that the structural factors, that are driving growth, are still pretty strong. So, we are expecting growth at about 8% for 2008. This is a comedown from 8.7% for FY08, that is ’07-‘08. But in a global economy, where growth is in short supply, I think 8% is still pretty good.
Q: What is happening on the oil front? We had news coming in that the government may look at a fuel price revision. In your estimate, if the fuel price was to be hiked by 5-10%, what sort of an impact would it have on inflation? By how much should fuel prices go up, to wipe out the under-recoveries, that oil marketing companies are currently facing?
A: Our estimate to wipe out the under-recoveries is about 20% increase in domestic fuel prices. This comes from our energy team. Our internal assessment shows that if a fuel price increase were to come about, let us say about 10% increase in fuel prices, that would give a kick to inflation of about 0.6 percentage points over 12 months.
Now, the maximum impact would come over 4 months. So, if the government were to announce a fuel price increase tomorrow, that impact is going to show up towards March or April 2008. But that is going to kick up the WPI by 0.6%. So, it is not insignificant, but we are not expecting the government to pass through all of the international prices at one go. That is the extent and the magnitude of the impact on inflation.
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