Anagha Deodhar, Chief Economist at ICICI Securities, feels high-frequency indicators are showing strong recovery. “This economic recovery is not just due to festive or pent-up demand but is more durable and genuine. Also, growth is likely to be much stronger in FY22,” she said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Q) What is your take on RBI policy? What does the accommodative stance indicate?
A) A small section of the market was expecting a rate cut, given the fall in headline inflation. However, we expected status quo on rates and accommodative stance being retained for a number of reasons. Firstly, headline inflation has not eased significantly so as to warrant a rate cut. The December 2020 print was 4.6 percent and we expect January 2021 print to be even lower. Still, inflation is above the mid-point of the target range of 2-6 percent. Secondly, the incremental benefit from rate cut at the current juncture would be very small given the very easy liquidity and financial conditions. Also, although there are clear signs of recovery, it is prudent to retain the accommodative stance in the near future to support growth.
Our analysis shows that the fiscal impulse of the Budget is modest. In FY22, lower revenue expenditure is budgeted to account for 85 percent of the consolidation between FY22BE and FY21RE. Total expenditure is budgeted to grow just 1 percent while expenditure excluding subsidies and interest is likely to grow at 11 percent and 9 percent respectively. Whichever way you slice the Budget numbers, the expenditure-to-GDP ratio is likely to fall. Hence, we do not expect the Budget to be inflationary.
Q) RBI expects FY22 GDP growth at 10.5 percent, citing significant improvement in the growth outlook. It believes that in FY22, India will undo the damage done by COVID. Do you feel the growth expectations can be achieved or surpass in FY22?
A) Yes, 10.5 percent is a realistic number. In fact, our in-house growth projections forecast real GDP growth rate of 10.5 percent and deflator of 4.5 percent, giving nominal GDP growth of 15 percent in FY22. High-frequency indicators are showing strong recovery. This recovery is not just due to festive or pent-up demand but is more durable and genuine. Also, growth is likely to be much stronger in FY22.
Some of the sectors that suffered in FY21 because of social distancing guidelines and consumer wariness (such as contact-intensive services sector) are likely to record strong growth in FY22. As vaccination drive in the country progresses, mobility is likely to pick up and the last few remaining shackles of social distancing are likely to get removed. H1FY22 could see much stronger uptick due to base effect but we have good reasons to believe that the momentum is likely to be carried into H2 as well.
Q) The RBI has revised its CPI inflation projection to 5-5.2 percent for the first half of FY22 against 4.6-5.2 percent earlier, while the CPI inflation projection has been revised downwards to 5.2 percent for Q4 FY21 from 5.8 percent earlier. What is your view and have you changed your projections? Will it remain above 5 percent in the current calendar year?
A) We expect inflation to ease in the coming few months. As Governor Shaktikanta Das pointed out, robust food production, good availability of vegetables during the winter and softer prices of some perishable items could help inflation soften. On the other hand, crude oil prices pose a risk to the inflation trajectory. We have revised our inflation trajectory following the surprisingly lower print in December 2020. As per our revised forecasts, inflation could moderately undershoot 5 percent in the calendar year 2021.
Q) RBI said CRR normalisation opened up space for more options to inject liquidity and announced a two-phase normalisation for CRR. It will gradually restore cash reserve ratio to 3.5 percent in March & 4 percent in May. It extended MSF relaxation for another six months. What is your view on the same?
A) We expected CRR normalisation given the huge liquidity overhang. CRR is a more durable instrument of adjusting liquidity and also has implications on banks’ profitability. Liquidity surplus in the banking system is still in the range of Rs 6-7 lakh crore. Also, the growth-oriented Budget is likely to attract foreign flows to Indian capital market which could lead to an increase in rupee liquidity. Moreover, the government is budgeted to spend around Rs 11.7 lakh crore in Q4FY21. Both of these factors could increase liquidity even further. CRR was cut as an emergency measure to infuse large liquidity in the banking system to minimise the impact of the pandemic on rates. Now that things are normalising, it makes complete sense to hike CRR to pre-pandemic level in a phased manner.
Q) RBI decided to include NBFCs in TLTRO on-tap scheme and will provide funds from banks to NBFCs under on-tap TLTRO. It will incentivise new MSME loans by banks. Will it boost NBFCs?
A) NBFCs are becoming increasingly important in India, given their outreach. They have the last-mile delivery capability of financial services and hence are important sources of financing. Measures such as including NBFCs in ‘on-tap’ TLTRO, excluding loans to new MSMEs from CRR etc. are aimed at directing and incentivising flow of credit to sectors that are currently underserved or are facing difficulty in accessing finance. As the economic recovery gains traction and risk appetite returns, we are hopeful of seeing a positive impact of these measures.
Q) Retail investors can now access primary and secondary government bond market. Retail investors can open gilt accounts with the RBI. Is it a surprise? How retail investors should go about now with gilt funds?
A) It is not a surprise as such. There has been a focus on increasing retail participation, making certain instruments available to retail investors etc. in the past. The objective behind this move seems to be increasing the absorptive capacity of government debt. Next year’s borrowing programme (centre + states) is expected to be large. The RBI, as the government’s debt manager, is trying to increase potential demand for SLR securities by undertaking these measures. Keeping HTM limit for SLR securities at 22 percent till March 2023 is also aimed at keeping demand for gilts high. This is a good development for retail investors as it gives them the choice of one more instrument.
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