Cost of India beating peer performance: Food inflation bites, 35 bps interest rate hike likely | INTERVIEW

India is performing better than peer nations, but this outperformance comes at a cost, in some way or the other, said Madhavi Arora, lead economist, Emkay Global Financial Services. In conversation with Lalit Kumar of FinancialExpress.com, Madhavi Arora said India looks to be a better bet than the rest of the world. Faster growth of imports than exports could cause current account deficit issues, Arora said. Consumption, exports, demand outlook, and rural-urban wages are the key triggers to look at in the current economic scenario, she added. Excerpts from the interview:

What is your overall outlook for the Indian economy? 

India looks to be a better bet than the rest of the world, but it comes at a cost, in some way or the other, since it implies that the imports are growing much faster than exports. That will come in the form of some kind of external imbalances in terms of current account deficit correction, which will also have some implications on the external sector’s vulnerability. Back home, the triggers in terms of secular growth seem to be still missing.

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What are the key triggers to watch? 

– Consumption, which was the big bellwether of the economy post 2013-14, also lost its sheen since 2018-19, and since then has been struggling in terms of becoming a more secular driver of growth.

– A mixed trend in demand outlook is apparent, factoring in the festive season. No secular demand impulse on the consumption side can be seen.

– Rural real wages have been in the negative range on an average for the longest period now, almost two years or so, while urban wages, although have seen a better increase vis-a-vis rural wages, in the long term, are seeing a bump down in every five years. More importantly, the urban wages have seen a very sharp K-shape behaviour, which means that there hasn’t been a secular increase in the urban wages either.

– Export is really a story of how the global demand plays out.

– All in all, India doesn’t seem to be having great levers in terms of taking growth to more than 7-8 per cent levels, which we envisaged pre-COVID.

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What is your view of India’s inflation release due in a few days? How does the road ahead look?

India’s inflation is expected to come off in the range of 6.7 per cent this month, which is still a very high number. The kind of food price inflation we have seen in the recent months has essentially put an upside risk to India’s inflation projection in the next 3-6 months. It will probably lead to some overshooting in the Reserve Bank of India and the market’s estimate as well. It also puts pressure on the year-end to look much worse than what it looked three months ago. Had we not incurred the food price shock, the inflation rate would have been much lower.

How will the Reserve Bank of India play out their next steps? 

The current situation clearly puts pressure on the RBI to continue with the rate hike. I believe we still have a maximum of 50 bps rate hike in the upcoming policies, including the latest in December. Except for the fact that the inflation now stands as worrisome from the food side, the overall outlook of the MPC will largely be the same as the last meeting. In such a volatile and data-driven economy, the upcoming MPC meeting in December may churn out at least a 35 bps rate hike. But things could change, depending on the inflation print for October.