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In an interview with CNBC-TV18, Robert Prior-Wandesforde , Head-India Eco, Credit Suisse, talks about the poor manufacturing data in May, Reserve Bank of India’s (RBI) policy tightening to curb rising inflation and the trajectory for earnings in first quarter of FY12.
Below is the verbatim transcript of his interview with Latha Venkatesh and Gautam Broker. Also watch the accompanying video.
Q: First up let’s begin with the problem at home. What did you make of the reasonably disappointing manufacturing number? Does it make you change your forecast for the year?
A: It was disappointing but not enough to make us change the forecast. It was a fairly poor set of numbers if one considers the year-on-year change and also well below expectation on adjusted numbers. It was a consistent 1% drop on the month and for second consecutive monthly fall on that basis. It looks as though the first quarter of this fiscal is going to get off or has started on very bad note. And, we might see industrial production contracting sequentially in that fiscal Q1.
Q: Given that inflation continues to remain quite high, do you think the RBI is going to take cognisance of this slowdown or inflation will remain a top priority and hence the rate tightening is going to continue?
A: The rate tightening will continue. Perhaps, the bigger factor is what is happening globally. I don’t think RBI is going to be terribly concerned by today’s production figure. The wholesale price index (WPI) numbers on the first day are going to be much more significant and there we are looking for a 9.7% outturn. Unless the turmoil in global markets continues and, bear in mind, we are still couple of weeks away from the meeting, we would still look for another 25 basis points increase on 26th of July meeting.
Read: Correction done; Infy nos, weak IIP factored-in, says HDFC Sec
Q: How far are we from the point where the RBI will stop its policy tightening, about 75 basis points?
A: We think another 50 points, including the 26th July meeting. But, frankly, we are surprised by the system’s strength of inflation and RBI’s increased willingness to tackle rising inflation by sacrificing some growth. The balance risk lies in direction and the fact that we get more rather than less acceptable and, say, this year situation blows up into something considerably worse.
Q: You referred to the fact that unless there is a debacle between now and 26th July, the RBI will persist with that rate hike. What is the in-house view from Credit Suisse? Are you all expecting that the kind of a newer brinkmanship that we are seeing practically twice week out of Europe is going to result in something seminal very soon in the nature of perhaps allowing a debt restructuring in one of the countries. What is the near-term view in Europe?
A: It’s looking almost by the minute now and some sort of restructuring is inevitable. Perhaps, it has been inevitable for some considerable time. The bigger picture situation here is really that the Europe finds it difficult to reach the kind of strong consensus and deliver the kind of strong measures that are required really to put a full stop to it. This is going to rumble on for some considerable time.
Q: In the meanwhile how do you expect equity flows to behave? Here we have seen a decent amount of FII flows coming in from the start of this month. Would the crisis for Europe mean more fund flows into emerging Asia, especially India?
A: Not necessarily, we are on a risk off phase and almost see the fund flows may now flow in other direction, that is, in the western and that’s what history suggests. So, I don’t think we can guarantee that.
But even if we look at India’s domestic fundamentals, I have been surprised by how strong fund flows have been after all India is facing downside growth risk at 7.5% and upside inflation risk a 10%. There are possibilities of more rate increases to come and not a great macro environment for the equity market.
Courtsey: http://www.moneycontrol.com/
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