Rahul Bajoria, Regional Economist at Barclays Capital, one of the world's largest investment banks, was in India recently on a whistle-stop business tour. In an interview with BT'S Rajiv Bhuva, Singapore-based Bajoria shared his views on declining industrial growth, capital inflows and interest rate outlook in India. Excerpts:
The moderation in the industrial growth is a function of a higher base. Around the same time last year, there was a significant pick-up in growth momentum. The sequential moderation seen over the last three to six months is not something we should be overly concerned about. The levels at which we were growing in the second half of last year were clearly unsustainable. Over the next three months, we could revert to decent growth numbers.
Most equity investors remain structurally bullish on India's growth story. This year, more than 50 per cent of equity inflows in Asia have come to India even though relative valuations are slightly expensive here. We may see some moderation in inflows, which will be a healthy correction, as globally growth is likely to witness moderation, impacting the risk appetite of investors.
RBI has not specified the neutral rate of interest and the corresponding levels of inflation and growth will determine this neutral rate of interest. The central bank is likely to pause after its September meeting to reassess the net impact on credit demand, deposit growth and the liquidity situation. If RBI remains comfortable with the current pace of rate hikes, it could restart its rate hike cycle from the next financial year. We expect only one rate hike to come through in the current year.
To gauge a neutral rate of interest one needs to determine the trend rate of growth and inflation. Over the last few years, RBI has been increasing its comfort levels on inflation. With inflation at five per cent and GDP growth at 8-8.5 per cent, the neutral rate of interest could be pegged between six and seven per cent. Depending on the nature of business cycle, the neutral rate could move up or down by 50 basis points.