Indranil Sengupta, Thematic Economist & Head of India Research, CLSA, says the dollar is strengthening and as a result, the rupee is weakening. It is not necessarily weakening against everybody. It is only weakening against the dollar. Sengupta points out that “RBI would want to build forex reserves and keep the rupee relatively soft. Everyone wants a weak rupee, but not a weakening rupee. If the rupee has weakened to an extent, then you will not allow it to regain, you will want to buy FX reserves, because ultimately that is your only weapon in a volatile world.”
So, what should we expect from the RBI governor now?Indranil Sengupta: I think we will see a pause and some more talk on bringing the inflation to 4%. The fact of the matter is that it is the Fed which will remain the key driver of what the RBI or any other emerging central bank does. So, till we get some clarity on the Fed beginning to cut or at least saying that, okay, we will cut in the next one or two policies, all central banks all over the world, at least in the emerging markets, will have to remain hawkish.
Do you expect the governor to indirectly drop a hint on liquidity more than rates because rates will impact liquidity and if you loosen up liquidity, it does not matter what the rates are?
Indranil Sengupta: Liquidity will not be a problem for the next few months, in the sense that we are in slack season. So, demand for credit will weaken seasonally. Rates are high currently and the real rates are even higher, but we are in the slack season and so demand for credit will seasonally wind down.
When ET Now spoke to the governor last and the specific of the question was whether the elephant in the room – the inflation fear – over and the governor responded by saying that fear was not over. The elephant has just gone for a walk and it could come back and it looks like the elephant is coming back. Crude is at $90. Copper prices are moving higher. We are in for a heat wave, which means vegetable inflation could also make a comeback. Is it time to look forward and say that inflation could come back?
Indranil Sengupta: Inflation is yesterday’s story. If you look ahead, we are moving from El Nino to La Nina. So, food inflation will come down. Of course, there is a very tough hot summer to go through, but all weather bureaus suggest that by June, El Nino will fade and La Nina will take its place. In any case, I do not think that you can combat the rain with rates. So, inflation is yesterday’s story. But all central banks will have to wait and see what is happening with the Fed.
I wanted to get in a sense from you as well as to what the future trajectory could be then. I know you are talking about inflation not being a major concern as of now, but even with inflation concerns perhaps having ease for the Reserve Bank, what do you believe will be the future course of action through the year?
Indranil Sengupta: So, we are looking at 100 basis points of rate cuts by June 2025. Now, this builds in on 75 basis points of rate cuts by the Fed in this year. Now, that is something we have to wait and watch because if the US core inflation does not settle at least at 0.3% month on month, which is 3.6% year on year, it is almost impossible for the Fed to cut. So, I think that right now rate cuts are much more of a global call than that of a central bank in any emerging market.
The assumption is that by June 2025, we are going to have as sizable as 100 bps of rate cuts. What are your other assumptions like, the growth figures, the inflation range?
Indranil Sengupta: Growth, we think will be around six-and-a-half in terms of GVA, so that is number one. Number two, inflation should be around five at best. So, we think that there is going to be ample room for the RBI to cut because historically if you see the long run real repo rate should be around 1% and we are already at more than that. The RBI’s own forecast of inflation next year is 4.5%, which means that you are far higher on the real repo rate and that cannot but have an impact on growth at least in terms of GVA. So, we are very bullish bonds. We think that bonds the 10-year can rally to 6.5%.
Where do you think bond yields will move once the bond inclusion starts? Do you think there is a serious case that they could go to 6.5, 6.6 I mean thereabouts?
Indranil Sengupta: That is our forecast, 6.5%. To some extent, the inclusion and the rate cuts are getting priced in, but there is another 50 basis points of downside.
Everything in India is looking great. Macros are great. GDP is great. Fiscal deficit is coming under control. Tax collections are strong. Capex has started. But why is the rupee at an all-time low when every economic indicator is supporting and favourable?
Indranil Sengupta: Because the dollar is strengthening. The dollar had gone to 0.98 a euro and the hope was that it will go to 115 or so by now because it would price in rate cuts by the Fed. But in the last Fed meeting, it was only by a whisker that they were able to keep the three rate cuts. One more member voting this side would have meant that the number of rate cuts would have come down to two. So the dollar is pricing that risk in and as a result, the rupee is weakening. It is not necessarily weakening against everybody. It is only weakening against the dollar as far as I can tell.
But the dollar index crossed 110 about a year, year-and-a-half ago and right now it is nowhere close to where the previous all-time low was. If we have to imply that same question, the rupee at an all-time low, the dollar index is not at an all-time low. Why is that?
Indranil Sengupta: You have to understand that the Indian Central Bank would want to build forex reserves and keep the rupee relatively soft. Everyone wants a weak rupee, but not a weakening rupee. If the rupee has weakened to an extent, then you will not allow it to regain, you will want to buy FX reserves, because ultimately that is your only weapon in a volatile world. If the rupee depreciates 5-10% because of a global shock, you will find that the RBI never lets it appreciate wholly back to original, it allows it to appreciate by a very small amount.
