On Circumspection St
Ajay Sondhi
Vice-President & Managing Director,
Kotak Mahindra Capital Company
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The central bank, while accepting the fact that liquidity, forex inflows and low interest rates are positive, has also cautioned about the impact of geopolitical changes on oil price stability, possible volatility in exchange rate market, need for hedging, and an urgent need for fiscal consolidation.
While the attempt will be to provide flexibility and a soft interest rates, the Reserve Banking India (RBI) has also indicated that there is little scope for a substantial fall in interest rates from the current levels. In addition, the apex bank continues to make slow but steady progress towards convertibility.
Interest rates may remain soft but volatile. While the rates have remained soft, the RBI rightly warns that the government needs to work on fiscal consolidation to keep the rates low.
We believe that this will be a challenging task given the slow progress or reversal of some of the reform processes and also since the general elections are due in 2004. It is likely that the yield on the 10-year government bond will range between 5.5 per cent and 6 per cent.
Our GDP estimates are lower. The RBI expects GDP growth at 6 per cent on the back of a 3.1 per cent growth in agriculture. This assumes below-normal monsoon projection of the IMD, but a good spatial distribution.
We believe that agriculture growth may be strong in the financial year 2003-2004, but the impact of the financial year 2002-2003 drought will be reflected in slow industrial production. Our GDP growth estimate is lower at around 5.2 per cent.
Inflation will fall from current high levels of 6 per cent and stabilize at around 5-5.5 per cent. This sharp increase was caused by rise in prices of: edible oils due to drought and, mineral oils due to high international crude prices.
Both consumer credit and working-capital financing drove strong credit growth of 17.8 per cent in FY2003. A slowdown in industrial growth, however, may break this strong trend.