The Economic Times
English EditionEnglish Editionहिन्दीગુજરાતી
| E-Paper

    This is the darkest before the dawn, expect turnaround in second half: Indranil Sengupta, BofA Merrill Lynch


    Ultimately it is consumption that will be driving growth, says Senior Economist, BofA Merrill Lynch

    Right now, given that there is a lot of slack in the economy but ultimately it is consumption that will drive growth, said Indranil Sengupta, Director, Senior Economist, BofA Merrill Lynch, in an interview with ETNOW.

    Edited excerpts:

    How would you expect agriculture, industry, services segments to perform the next financial year?
    This financial year, we are looking at a growth of 6.8% and in this particular quarter, we are looking at growth of around 6%. Going forward, this pain will last for another quarter or two and then we could see a turnaround in the second half of the year. We are looking at about 7% growth next year.

    There are really three factors at work -- the first is the base effect which will go away by June. The second is the RBI’s liquidity crunch which took place in 2018. In a sense, the genesis of what you see today was the liquidity crunch of 2018. But after Governor Das has taken over, the RBI has been injecting liquidity and the impact of that should show up in the September quarter in the turnaround. The third is of course the US-China trade war. Our base case expectations is that may be that would get resolved in the second half of the year and that will also scale back global uncertainty. The bottom line is that this is the darkest before the dawn.

    Which segments according to you are going to drive growth? When do you see a recovery come in? Will it be consumption or do you think it is going to be a very investment led recovery?
    It is obviously going to be consumption. First, you need rate cuts which in turn will support consumption and will lead to exhaustion of capacity and then you will see capex. Right now, given that there is a lot of slack in the economy, it is obviously going to be consumption.

    On June 6, the MPC policy is coming up. There is the expectation of a rate cut, but how much can that rate cut help the economy at this juncture and really give a leg up to consumption? Is the need of the hour for the RBI is to address liquidity in the system as opposed to just bringing down rates?
    Of course, we are looking at 35 bps rate cut on June 6th. The RBI has already begun to put in about $2 to $3 billion of durable liquidity every month. The transmission got delayed by the fact that we had elections which led to high cash demand but as you go forward into the next month, we should see the money market getting into surplus reverse repo mode, barring the advance tax payments and that should help transmission. You need rate cuts and you need the money market in surplus reverse repo mode for transmission.

    Yields are down by more than 35 bps in two weeks. Do you expect a lower cost of funds for corporates? Going ahead, what would be your outlook on the yield and the rupee?
    Assuming that the RBI provides durable liquidity of $2-3 billion a month which is what they are doing and we see another 50 bps of rate cuts, we should see lending rates coming down by about 50 bps by the end of the year. The rupee we see roughly around the same current levels through the year around 70.

    What do expect the government to do in terms of moves to revive investment? What are the financial sector reforms that you are hoping to see?
    Well, we think that the BJP manifesto has spoken of boosting investment by reducing the cost of capital and it has been our long-standing call that the RBI needed to cut rates, needed to provide liquidity to reduce lending rates so we see that happening.

    The other thing is that we will probably get anything between Rs 1 trillion to Rs 3 trillion of excess RBI capital from the Jalan Committee and that can be used to recapitalise public sector banks and bring down lending rates further.

    I am sure that the government will take other steps to support investment but till the cost of capital is lower, it is very difficult for those steps to fructify as we saw for the last few years. The first effort of the government will be to intensify policy initiatives to reduce the cost of capital.

    What is your outlook on trade given the current scenario?
    We think that our current account deficit will be around 2.4% of the GDP and even with $22 billion of portfolio inflows, the RBI will hardly be able to buy $10-15 billion. The global environment will remain uncertain for now, which is not the best of news for trade. But that said, we do think that a lot depends on what happens with the US-China trade war and how long that persists.

    What about the flows in terms of FII, FDI investments?
    We are looking at close to $ 60 billion from FDI and FIIs. We are looking at about $22 billion of FPI investment into the economy.
    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

    Also Read

    The Economic Times