However, she expects the easing cycle could begin by February, provided the global dollar environment stabilises.
“Our best hope is for something to come up in February in terms of monetary policy easing,” Bhandari said, adding that it remains a “toss-up” between February and April, with February as the current forecast.
Bhandari noted that inflation is no longer a pressing concern, as prices, particularly of vegetables, are easing. “Inflation will fall from 6.2% last month to 5.5% in November, and could decline further in the coming months,” she said.
This creates room for the RBI to act, but the timing will depend heavily on global dollar movements.
The next RBI Monetary Policy Committee (MPC) meeting is scheduled for December 4-6.
This is the verbatim transcript of the interview.
Q: Do you think we will even make it to 6.5% GDP because I had quite a few people saying 6.3-6.4% for Q2?
A: We are at the 6.5% ballpark that is our forecast, and fingers crossed, we will know in a few hours. But I think the details are important. I think what we have seen really, is urban consumption slow in this quarter. A bit of it has also come from the fact that we don’t have very strong consumer loans anymore. Some of the salary and wage growth at high end sectors has softened a little bit, and rural consumption hasn’t yet picked up.
We all hoping it picks up, but it hasn’t yet picked up. And then there was government expenditure, at least in the first two months of the quarter. It was quite weak, we were coming out of the elections. It only picked up in the September month, but we haven’t really seen all of its growth impact yet. So putting all of it together, the September quarter will not look very good.
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Q: What about second half, I have a wide range, with some people expecting lower than 6.5% also for the second half and, of course, Reserve Bank standing at 7.4%?
A: I am a little more constructive on the second half and I think for me, the big change could be rural India. Already I am seeing agriculture data picking up my senses. We have come from a very bad agriculture year. The money farmers made in the summer crop, kharif crop, they didn’t use it for spending. They used it to build back savings. I can actually see it in the Jan Dhan cash balances that rural Indians have.
But the money they make from the winter crop, which we see in February, March, I think that will be spent more on consumption. And then we can see an uptick in consumer staples, two-wheelers, the kind of things rural Indians buy.
Also on the side, we have government, which has given out a lot more money for capex over the last couple of weeks. Once that starts and that construction boom begins, we will see remittances go back from urban to rural India, something that had stopped in the last couple of quarters. My sense is, and I am looking for a rural rebound, not immediately, but around February-March.
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Q: The Reserve bank may not have that much scope to cut. What are your expectations? Secondly, they were generous with liquidity earlier this year, but now, since they have forced to sell dollars, they are obviously draining liquidity. There is a chance that liquidity will not be plentiful. For both reasons, do you think credit offtake may not be gangbusters?
A: RBI is looking at two things. One is inflation, and the other is what happens to the dollar and FX generally. The good news is that inflation is coming off. Even in the last week, we finally started seeing vegetable prices come down. My sense is inflation will fall from 6.2% in the last month to 5.5% in November, which is a pretty substantial fall, and could fall even more in the next couple of months. So inflation is not my number one worry.
What I am really looking at is what happens to the overall dollar index if at some point we realise that it has overreacted and it stabilises or weakens the RBI will get its chance both to cut the repo date and also to rebuild its FX reserves, which, in a way, is how you can infuse domestic rupee liquidity back in the system and things will be fine.
Except that I don’t see this dollar retracement right away. So the December policy meeting, the RBI will not be able to do very much. And our best hope is that something comes up in February in terms of monetary policy easing.
Q: You expect a rate cut in February?
A: That is our forecast for now. But a lot depends on the dollar environment and in a way, it’s a toss-up between February and April, but our call is for a February right now.
For full interview, watch accompanying video
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