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StanC pegs GDP at 7.2% in FY18, says GST may slow down growth

Indian growth story does not look rosy if we have to go by the estimates of analysts at Standard Chartered. In conversation with CNBC-TV18, Anubhuti Sahay, Head-Economic Research pegs gross domestic product (GDP) at 7.2 percent for financial year 2018 versus 6.8 percent in 2017. This is while a majority of economists expect FY18 growth to be 7.5 percent or higher.

Sahay pointed out three concerns that she believes will slow growth; the effects of remonetisation lingering on in the initial part of the second quarter, global data suggesting Goods and services tax (GST) has proved detrimental to growth in the first year of implementation, and uncertainty on recovery in the investments cycle. GST is likely to be rolled out in India on July 1.

The Reserve Bank of India (RBI), in its monetary policy meet, changed its stance from 'accommodative' to 'neutral' signaling no rate cuts in the near future while maintaing status quo on rates. Sahay, too, expects no rate cut in the next few quarters with the current outlook of RBI. She said from yields perspective this means that the 10-year yield will stay at 7 percent.

Policies proposed by US president Donald Trump has led to lot of uncertainties in the market. Chief Economist Marios Maratheftis said uncertainties regarding Trump policies is high. However, according to Maratheftis, markets are too optimistic and they are not pricing the risk for 2017 right now. If the gifts of Trump policies materialise then that will be taken away by the US Federal Reserve, he said.

Markets are optimistic on hike in interest rates after Janet Yellen said the hike should come sooner than later. According to Maratheftis, Fed wants to increase rates before another recessions strikes the nation. He expects two hikes this year. He said the risk will be on the upside if the Fed doesn’t hike two times this year. Below is the verbatim transcript of Marios Maratheftis and Anubhuti Sahay’s interview to Ekta Batra, and Prashant Nair on CNBC-TV18. Ekta: Is 2017 according to you going to be a year of better growth than 2016? Maratheftis: It could possibly be a year of marginally better growth, but I am not getting too excited with the world economy. First because 2016 was a year of particularly weak global growth, so, slightly better doesn’t necessarily mean it is going to be that great and second because I think it is going to be a year of elevated uncertainty. There is a lot of uncertainty especially originating from the United States. Ekta: That exactly was the point when we were talking about growth but equity investors have discounted a lot of the positive announcements from Trump from the other perspective. Do you expect disappointment and hence a downturn for equities according to you? Maratheftis: I think this is possible. The market has given United States all benefits of all doubts. They are pricing in all the positives and I think there is very little consideration about the things that could go wrong. I think that the excitement regarding the reflation story in the United States is overdone. I think there is very limited slack in the US economy right now and any sort of fiscal stimulus could lead to slightly higher growth, but it could also lead to higher inflation. I think the Federal Reserve will be responding to that. The Federal Reserve wants to increase interest rates anyway before we get another recession in the United States. If we have reflationary policies that Fed is likely to respond, is likely to hike interest rates in response to that, that could lead to a higher dollar and any of the gifts, if they do materialise from a reflationary policy from Donald Trump are likely to be taken away later on by the Federal Reserves. So, I agree with you, markets are too optimistic and I don’t think they are pricing for risk right now. Prashant: How much do you think the Fed will hike in this year 2017 and secondly what do you think US treasuries, the 10-year for example will do all the way going up to June? Maratheftis: I think for now, for this year the Fed will probably be hiking by two times. The risk will be on the upside. If they don’t hike twice, they will probably hike more. I think they are also likely to hike another three times next year; that is our main case scenario, but I believe that in this environment if we do see any of this reflationary policies actually materialising, the risk is that we might see more rather than less and that will have an impact on the dollar as well and it will also have an impact on market sentiment. Prashant: What about the Dollar Index and treasuries? Maratheftis: I think the risk on the treasuries is again on the upside. They have moved already in anticipation. I think if we do see the policies because that is the big question right now, what kind of policies are we going to see? Are we going to see expenditure in infrastructure? It has been announced, but I think it is less likely to actually materialise. Are we going to see tax cuts? More likely, but to whom will this be tax cuts targeted. I think the uncertainty regarding this policy is high. But, I believe that if we do see at least some of these policies actually materialising, we should expect 10-year treasuries higher. We should expect Fed funds target rate also higher. We should be expecting a stronger dollar which is very important for markets around the world. I believe that all this tightening of monetary conditions both through interest rates and through the currencies will be taking away any of the initial benefits of a fiscal stimulus. The problem is right now, markets are too focused on the positives and they are not factoring enough to my view the possible negatives later on down the line. Ekta: What is the Indian yield trajectory that you are looking at? Sahay: One of the most important things which we will have to watch from the yield trajectory perspective is what RBI does. That brings us to our main view, do we expect any more rate cuts from the Reserve Bank of India going forward. Probably, not. Given that RBI has changed its stance from accommodative to neutral and if you actually look back on all the policy statements from RBI since 2004 a rate cut or a rate hike has never happened with RBI on a neutral stance, so RBI first have to switch its stance. The second important question is even before the RBI changed its stance, the market, people like us were debating about a rate cut of only 25-50 basis points. So, if that is the quantum of rate cuts which is possible it doesn’t make sense for RBI to go and change its stance and deliver another 25 or 50 basis point of rate cuts only. So, we do not think that there are any more rate cuts or rate changes happening for the next few quarters. That effectively means that from the yields perspective probably what we have seen is likely to remain. There is always a kneejerk reaction, so some bit of normalisation is possible, but probably we are likely to stay closer to 7 percent as far as the 10-year are concerned. On the short end, it is likely to remain more closer to the repo rate given that the liquidity is still pretty good in the system and we think it is likely to remain so over the next few quarters. Prashant: If you believe yields are going to remain at 7 percent then should we expect banks to lower their lending rates and also if you can just run us through your expectations for growth both gross value added (GVA) and gross domestic product (GDP) for this year that is 2017 and FY18 as well? Sahay: From the growth perspective, we are more conservative than the rest of the street. If you look at the Bloomberg consensus, bulk of the economist expects FY18 growth to be closer to 7.50 percent or may be even higher than that. We think that is unlikely to happen. With the remonetisation impact still playing out, we think the after effects will linger on till the initial part of the second quarter. With our base case that goods and services (GST) will get implemented from July 1st 2017 and if you look at the cross country experience GST is bad for growth in the first year of implementation. Last but not the least what Marios mentioned, uncertainty from investment perspective which is a sore point for India at this particular moment this uncertainty both external as well as domestic in our view will keep investment on a more sluggish footing and recovery can get delayed further. We are working with a growth GDP number of 7.2 percent for FY18 versus 6.8 percent for FY17. If I have to highlight a risk we do see risk of a slower number than what we are forecasting for FY18.

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