RBI May Not Be In A Hurry To Ease Rates, Says HSBC's Pranjul Bhandari
"Even if RBI eases, my sense is that rate cut will be very shallow", says Bhandari.
India should leverage its robust growth and the absence of any substantial pressure to cut rates to bring inflation closer to the targeted 4%, according to HSBC's Pranjul Bhandari.
It is anticipated that the Reserve Bank of India may not be in a hurry to ease rates, and "even if the RBI eases, my sense is that the rate cut will be very shallow", Bhandari, Chief India and Indonesia Economist at HSBC, told NDTV Profit's Niraj Shah in an interview. "I am celebrating the growth in India."
India is experiencing exceptionally robust growth, with January data surpassing the performance observed in the last quarter of 2023, she said. "PMI services, in particular, right now, if you look at it, the new orders are at a one-decade high."
The input prices are at a four-year low. Corporate margins are also improving a little bit, she said. "Things are looking really up this time."
Bond Inclusion
The Indian economy has experienced substantial $10 billion inflows starting in October after JPMorgan announced the inclusion of Indian government bonds in September. This influx is noteworthy, considering that the actual inclusion is scheduled for June 2024, Bhandari said.
"It is expected that the economy will receive even more funds once the inclusion becomes effective in June," she said.
The potential inclusion of India in the Bloomberg EM Bond Index is expected to bring in $3–4 billion, serving as a crucial step towards gaining entry into the Bloomberg Global Aggregate Index, Bhandari said.
The consecutive series of inclusions is anticipated to work like magic in the bond market in the coming years. This development suggests that the Indian rupee is well-funded, as the significant inflows contribute to a robust balance of payments, according to Bhandari.
While the last year witnessed flows primarily from the equity market, FY25 is expected to see substantial inflows from the bond market, followed by foreign direct investment inflows from fiscal year 2026 onwards, she said.
Watch The Full Interview Here:
Edited Excerpts From The Interview:
Pranjul, while the whole risk asset community was watching out for when does the commentary and the actual action around rates in the U.S. happen, the recency in prints across core CPI or otherwise in the U.S. isn't very pleasing. Jerome Powell said the same, which is that there's no number out there or no timeline out there.
Could the unthinkable of 2023 happen, which is that we may not see any rate action in 2024 from the U.S. if inflation prints stay higher than what is envisaged?
Pranjul Bhandari: These are great questions. If you take a step back and look at global growth, it's actually doing very well. We just got the February PMI numbers for all countries and global PMI is showing that manufacturing globally is now in expansion mode. Just two months ago, it was in a contraction mode. Services PMI is doing even better. New orders, future expectations are only rising across literally many countries. India, obviously is spearheading all of this.
Even in the US, the PMIs have done very well. Some of the ISM prints have been extremely strong. So generally speaking, it almost seems like growth, you know, is much better now than it was a couple of months ago. Of course there are problems, there are issues out there. For example, Red Sea, and we could see some fallout from there later, but it's not really being seen in the data, at least, you know, right now.
This brings us to inflation. And as you mentioned, January U.S. inflation looked extremely strong, it was higher than expected, more coming from services than from goods. My sense is that yes, this will make a lot of policymakers in the U.S. more thoughtful about the rate cutting cycle than before. To be sure. I think if you look at a very Taylor rule kind of approach, there is space for rate cuts in the U.S., but because January inflation came in so much higher than expected, I think, right now all eyes are on February inflation. You know—will it also surprise on the upside, or will it show some softening? So there are lots of moving parts and we are all prisoners of monthly data at this point of time.
You know, a US economist does have his Fed rate cut, first rate cut in June. I must say that he's had it there for like over a year now, especially when markets were expecting rate cuts much earlier in the year, he was like a standout view. So from that perspective, he was expecting later rate hikes. But right now because the Taylor rule suggests, so he's keeping to his June 1st rate cut, but of course, I think, February inflation data will have a lot of meat there.
What is a combination of what you just mentioned with regards to global manufacturing, or so and so forth and if indeed, the U.S. inflation print is not benign, let's say and you add to the fact that Indian central bank will not necessarily make a move on the downside, if the U.S. Fed is staying pat and we have the Indian growth numbers looking the way they are.
Does it kind of push back any kind of hopes that people might be having for the central bank of India to make a move in order to support growth?
Pranjul Bhandari: Again, a great question. Growth in India has been extremely strong. Maybe later, if time permits, we can talk about the December GDP number.
But actually, more important is the data that has been flowing in after that—the January and February PMI, for example. We've seen much better data in Jan- Feb than we saw in the last quarter of 2023, both for PMI manufacturing, PMI services. PMI services, in particular, right now if you look at new orders. It is at a one-decade high. If you look at input prices, it's at a four-year low which basically means that corporate margins are improving a little bit in Jan-Feb compared to the previous quarter. So things are looking really up at this point. And my sense is, that when you have such a great opportunity that growth is extremely strong and there's no real pressure to cut rates, why not use this opportunity to bring down inflation with that 4% target which you have been talking about a lot.
So, yes, you know, a very long answer to your question—that if growth remains so strong, and there are no rate cuts globally, my sense is that RBI will not be in any hurry to ease. Even if RBI eases, my sense is it's going to be an extremely shallow rate cutting cycle, because what does it mean for rate cuts at a time when growth is anyway doing well and you know, and things are on the right side and inflation is not yet down to 4% or close to 4%.
Your GDP note was that you need to calm down. That was the title and then I hear you say right now that while GDP came at what it did, the PMI data is extremely buoyant. So do people really need to calm down or celebrate growth in India?
Pranjul Bhandari: Look, I will celebrate growth in India. I am very excited about it. But I think the 8.4% number was, you know, had a lot of statistical issues in it and that was my point. By the way, this title ‘Need To Calm Down is actually a Taylor Swift song and Taylor Swift is in Asia this week. So I just thought it would be a nice touch.
But you know, that apart, my sense is that we need to look at the GVA (gross value added) numbers a little better than we look at GDP numbers. And I'll just tell you two quick reasons for it. You know, GDP is GVA plus indirect taxes minus subsidies. It's all a little complicated. It should normally be alright, but there are two reasons why a divergence between them can sometimes creep up. One is a very India-specific reason. The fact that when we pay out subsidies it's cash payout, it's not accrual accounting. So what we do is that even the subsidies for December, if we pay it out for March, then the whole thing will be shown for March and not for December. We do cash accounting, and that messes up the number of it.
The second is global. You know, these are very different times. We have seen commodity prices go up and down. In the December quarter, we saw a 65% year-on-year number, in terms of fall in fertiliser prices. That also brought down the subsidy bill. The subsidy bill was extremely low because of which the GDP turned out to be much higher than GVA. It really doesn't have very much to do with the growth on the ground. So if you want to get a sense of growth on the ground, it's better if you follow GVA, particularly given some of these little things that creep up into GDP, especially in India.
I mean GVA, per se, relative to the rest of the world even if the GVA numbers are looked at. One, probably not as bad. Yes, we don't have that fancy 8% print, but not a bad print. But the addition that I'm making to that is that even if you look at GVA or the GDP and looking strong, consumption isn't quite firing.
Is that a reason or a cause for concern? Can any regulatory action or a policy action amend that, or will it only stem out of confidence and wage growth?
Pranjul Bhandari: I'm very happy you asked this question, because my sense is that consumption growth which we are seeing in GDP is under-reported and my sense is that in subsequent revisions, which will happen in between the next 1-3 years, this consumption growth number will be revised upwards.
I'm saying this because, you know, we are seeing investment growth being strong. Over a long period of time, if investment growth is strong, then consumption growth is also, you know, stronger than before. They move together because people who are working in these investment, construction sites are earning some wages which they can spend. Even if it's capital intensive investment, the owners of capital get remunerated. So my point being that you can't have such a huge divergence between investment and consumption.
A couple of other points. If you look at GVA personal services, which is hidden in the GVA, that's extremely strong. That's 7.5%. That is personal consumption and it doesn't match with the 3% private consumption that we get in another part of GDP. So I think there is some problem going on here.
Finally, look at bank credit data. If you look at personal loans, you take out a mortgage. So personal loans for non-housing, even that is extremely strong. And a lot of that is there to fund consumption.
And sorry, one more final point. If you look at consumer imports, they are on fire. They are 50% higher than pre-pandemic levels. So when I put all this together, it seems to me that this about 3% private consumption growth, which we're seeing in national accounts, is a little bit of underreporting and you know, there are a lot of issues here, but I think in the next couple of years, it'll get increased a little bit.
Okay, so you're saying that there are challenges to capture this well, and those challenges will get ironed out which will result in the correct reportage which according to you will be higher than what is showing right now?
Pranjul Bhandari: Yes.
Pranjul, I don't remember it exactly to the T. But you tend to bring out these points when you look under the hood and look at what's happening to data, which is not quite visible.
You had mentioned some time back that when you looked at the rural balance sheets, there were some high frequency indicators, which indicated that that part of the market was not hurting as much as is widely believed now. This was maybe 3-4 months ago. Some time has passed from then until now. Is that trend continuing? Is rural a lot better than what the market is fearing?
Pranjul Bhandari: I think I will hold on to that view. Look, at no point am I saying that rural is rising rapidly. It's not, particularly because last year was an El Nino year, and the kharif production was weak and you know, we know that there were a lot of stresses out there. So I'm not saying rural incomes are doing extremely well. But at the same time, I don't think there's rural distress because that alternate employment in construction sites has really picked up. A lot of people are working in, you know, these construction sites and sending money back home, which I can actually track from some of the remittances data that we get. If you look at cash balances in Jan-Dhan accounts, which are mostly rural, those are also higher than before. So I do think that things are not as bad as they could have been, if you did not have this construction boom in the economy, that is going on at this point of time.
But having said this, I do think that there are signs of K-shaped recovery. I'm not against that point, because one group of people is doing much better than another group of people. Like I think one strong source of growth in the country in the last couple of years has been professional services, exports, the advent of global capability centres, people associated with those high growth sectors are doing much better than somebody who's in rural India and is having to grapple with El Nino. So, a K-shaped recovery is there. But my small point is, that the rural distress is not as much as a lot of people have made it out to be because they have alternate sources of income from construction.
Pranjul, one final question and that is on yesterday's announcements around Indian bond inclusion in the Bloomberg Bond Index as well from Jan. So we have JP Morgan from June this year, or thereabouts, then six months hence, Bloomberg index as well.
How material from a 2-3 year perspective would a combination of these two and some other indices be for the bond market depth?
Pranjul Bhandari: We got the announcement in September last year for inclusion into JPMorgan Emerging Market Bond Index. Actually it's going to start in June, but already in the runup since October, we've seen $10 billion in India's bond market. So, it is substantial. My sense is that when the actual inclusion happens in June, then we will get even more money. So that is exciting. And then you know, we got this announcement yesterday for a similar inclusion in the Bloomberg Emerging Market Index, which according to some calculations could bring in another $3-4 billion over the next couple of quarters.
The one that is awaited is the Bloomberg Global Aggregate Index, which is a far bigger index, but a lot of people think about this as a stepping stone towards inclusion into a bigger index. So, if over time we are going to see a series of inclusions, then yes, I think the sort of magic we used to see in terms of portfolio inflows into equity markets—last year, it was $25 billion or $30 billion—we could see that kind of magic in bond market like right over the next one or two years. So I think that is interesting.
But taking a step back, what this really means is that the rupee is extremely well-funded. You know, my magic number is $25 billion. If we get this extra inflow of $25 billion from somewhere or the other every year, then our balance of payments goes into a big surplus and the rupee becomes extremely well-funded. Last year, it came from equity markets. In FY25, I think will come from bond markets and then I think from FY26 onwards, it will come more from FDI inflows. And that is just another interesting part. FDI inflows into India have slowed, but my own sort of work suggests that in a two-year horizon they will start to pick back up and not just that, they will double. And I'm saying that because I track a lot of foreign investment intentions data into the country and there are a lot of intentions into into futuristic sectors—from semiconductors renewables, green hydrogen, and AI. and I think all of that money will materialise in a two-year horizon. So the rupee remains extremely well-funded.
