Talking to ET Now, Radhika Rao, India Economist, DBS, says any of businesses looking for a longer term sustainable investment will be much interested in investing in India and so the FDI inflows will continue to come in
RBI monetary policy was a key event last week. How have you read into the kind of commentary that came out from the RBI governor? What is your expectation in terms of a follow-through for the rest of the year from the Reserve Bank?
It was a mixed message from RBI. The bigger surprise was the marked change in the tone. Compared to the minutes that came out of February meeting, they sounded much more comfortable with the inflation outlook. Not only was the March 2018 quarter inflation forecast downgraded, but even for FY19, the entire trajectory was lower.
I thought the tone and relatively dovish inflation projections were surprising. But they tried to balance that by highlighting risks on the horizon. We are pretty much in agreement with how the MSP it is an uncertain bit on how MSP and oil prices in particular will pan out.
Compared to where the consensus is, we are not as wary of the MSP increases. If the government does stick to the A2 plus FL cost concept, I do not think the extent of increase in the MSPs will be as big as the popular narrative seems to suggest. That said, for FY19, our inflation numbers are at 4.6% on average and that means, inflation will be above target but not acute enough for the central bank to act.
To that extent, RBI is settling in for a long pause into 2018, banking on what is happening on factors that are exogenous to their forecast. In that account, this weeks inflation numbers will be quite benign at about 4.1% according to our estimates.
Can you just talk to us about what is happening in the global economy? With the sort of view that is coming in on different trade wars and rates going up, what is the sense that you are getting? Do you think that global economic growth could also slowdown if this global trade worry increases?
I would not call it a trade war as yet. Right now, it is primarily between the US and the China but the Indian economy will not be immune as well. If we take for example the steel and aluminium tariffs that we impose earlier this year, India has also not been exempted from that list to the extent that next weeks India-US trade talks will become important and where India is going to ask for an exemption.
If that does not come through, India will join counterparts to call against this kind of import tariffs. It is also interesting that India itself has also taken protectionist moves in the past few years. The rational was to promote manufacturing growth in the economy as well as create more jobs.
So it is a two-way street but in so far as the impact from trade tariffs particular is concerned, for India, services will be a bigger thing to play for than goods trade. Services trade surpluses actually came down in the past three-four years from about 4% of GDP to 3% which does not bode well for our current account math.
On the other hand, the US rates are factoring in what the Fed is going to do. The Fed will also act as the evolving growth inflation trajectory pans out for us. We expect three rate hikes this year. The latest bout of US employment numbers were weaker than expected but that partly has been put to seasonal effects. We do think the global growth carries a positive momentum and it will keep the Fed and gradually, ECB and the other global central banks will join, probably not this year but in 2019-2020. Otherwise, we are not as cautious on the global growth trajectory.
Does India stand well with the sort of rates that we have for 10-year bonds? Has India become a favourable investment destination for FDI and FII investment?
Certainly. FII portfolio investors by nature look for value and then you would see a movement in and out. But on a broad basis, earlier late last week, the FPI limit for debt was raised. It was a bit smaller than anticipated and we had expected at least 1% increase this year. But it was 0.5% for FY19, another 0.5% by FY20. To that extent, FPI inflows will be smaller than expected earlier. Nonetheless, if Indian rates remain at attractive levels along with a stable currency, we should see inflows continue to come in
On the FDI front, the momentum that we saw last year did not taper out during the second half of last year and if this protectionist talk gathers momentum, some of the real corporates might adopt a wait-and-watch approach. Compared to the other EM markets, our structural factors as well as growth momentum is coming back in a strong way.
We think that any of businesses looking for a longer term sustainable investment will be much interested in investing in India and so the FDI inflows will continue to come in though probably not as strongly as we saw in FY17-FY18. But that is still about 40-50 billion this year. The other factor that will be watched is the election and how the reform momentums sustains ahead of it. I do think that foreign investors as well as FDIs will continue to stay invested in the economy.