Economy - Policy priorities shift away from growth - Ambit

Our discussions with policy experts in Delhi and Mumbai suggest that the new RBI Governor is likely to focus on defending the currency and crunching inflation whilst de-focusing on growth. Furthermore, the FM is likely to deliver on his stated fiscal deficit target (of 4.8% of GDP), implying that Government spending is set to taper off in 2HFY14. With neither the monetary nor fiscal policy now in a position to support growth in India and given the negative GFCF growth in 1Q, we cut our FY14 GDP growth forecast from 6.4% YoY to 4.7% YoY.

In our note dated 19 July 2013, we highlighted that the Rupee, Repo rates and the RBI are likely to determine the strength of the recovery in India in FY14. Since then two critical developments have transpired, namely,

- A spike in macroeconomic uncertainty: The fear of tapering, the RBI's halfhearted FX intervention and events in Syria have led to a surge in macroeconomic uncertainty. In line with other EM currencies, the INR has depreciated by 13% against the USD since our note on 19 July 2013 (and by 23% YTD). We clearly underestimated the strength and potency of these adverse external shocks.

- A dramatic reorientation in policy focus: Our discussions with policy experts late last week suggest that the new RBI Governor (who assumes office this week) is likely to focus on defending the currency and inflation control whilst de-focusing on growth. This in turn leads us to change our initial expectation of a 25bps repo rate cuts in 4QFY14 to repo rate increases of 50-75bps (although the distorted form of intervention that the RBI has been pursuing since mid-July might be rolled back). Furthermore, given that senior fiscal experts in Delhi are confident that the Finance Minister is likely to deliver on his stated fiscal deficit target of 4.8% of GDP despite the passage of the Food Security Bill; means that Government expenditure growth is likely to taper off in 2HFY14.

Investment growth contracts in 1QFY14

Whilst the headline GDP growth in 1QFY14 was 40bps below our expectation, what is more worrying is that manufacturing sector growth lost momentum in 1QFY14 GDP, after recording three consecutive improvements. To compound the FY14 growth challenge, investment growth recorded a contraction (as against our expectation of weak but positive growth) after three consecutive expansions. Given that 2QFY14 is when the RBI's tight liquidity measures kicked in, it is likely that the loss in GFCF momentum would continue into 2QFY14.

We cut our FY14 GDP growth estimate to 4.7% YoY

In view of the coming re-orientation in the monetary and fiscal policy focus, we increase our interest rate assumptions for FY14 as well as the 'economic crisis factor' (to reflect the heightened macro uncertainty in 2QFY14). We also taper our expectations of fiscal spend in the rest of FY14. The combination of this result in a decline in our headline GDP growth forecast from 6.4% YoY to 4.7% YoY (see page 6 for details).

Investment implications

The extent of our reduction in FY14 GDP estimates has adverse implications for our Sensex target of 23K. We will articulate these over the coming week. However, the cut in our GDP estimates might not significantly change the overall 'shape' of how we believe investors should position their portfolios (migrate from defensives to cyclicals, ex-banks), focus on exporters and migrate from 'growth' to 'value' stocks.

Source : Equity Bulls

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