Right sentiments needed to push Re to 55-level: India Ratings

Last Updated 15 December 2013, 08:00 IST

Rupee needs a major push of positive sentiments to move back to Rs 55 level against the US dollar, but that is likely only after March or post general elections, India Ratings chief Atul Joshi feels.

"Fundamentals are not reflected into current rupee levels and it needs to move back to 55 level.

"But, since its fall was due to negative sentiments, positive sentiments should create a bias towards 55, but that would be post March and may be post elections," Atul Joshi, MD and CEO, India Ratings & Research, told PTI in an interview. India Ratings is the Indian unit of global giant Fitch Ratings group.

Joshi, however, said that elections as such are unlikely to have much impact on GDP growth rate of the country and a recovery process is already underway and that is unlikely to stop, unless a new government reverses some reforms.

"Wheels have started turning, so it is unlikely it will stop and we would see GDP growth at something closer to 4.9 per cent this year even if nothing much happens.

"We are expecting good results from at least two harvest seasons and the positive momentum should now move to the services and agriculture sectors as well.

"The worry that we had was that agriculture was not performing well for last couple of years. Now an improvement on that front would create a lot of rural consumption and that would result in an uptick in manufacturing and on back of that services sector would also get a boost," he said.

Within services, India Ratings sees lot of momentum in financial services which has grown impressively in recent past despite an overall sluggishness in services sector.

This is not about any drastic changes in numbers, it is rather about change in psychological barriers, he said, adding that the noise that India is sinking and everything is going wrong will go away.

"We have already reached the bottom and now from here, the recovery will start. So, what we see next fiscal year is around 5.6 to 5.8 per cent of GDP growth. So, there won't be any drastic change by moving to 6 per cent and above.

"Elections or no elections, that would not have much impact on the GDP number, unless there is a rollback of policies and measures which is a very unlikely event. That would be like government going backwards and I don't think any government would do so," he said.

Asked about the major challenges before economy and policy makers, Joshi said there are two major things that can topple the momentum,  one is inflation and the second is currency.

"If inflation moves above 10 per cent for the next two or three months, and remain there, that could have a negative impact on lot many other sectors. Retail is one, SMEs, manufacturing, these would face pressure if interest rate is going to go up. This is on backdrop of RBI's focus on inflation control.

"So, I guess inflation is the biggest worry. Second would be currency. When rupee was at 54-55 level, since then prices of many items have gone up substantially. One of the factors that seeds inflation, is currency," he added.

Talking about recent plunge in rupee that saw it hitting record low levels very close to Rs 70 against dollar, Joshi said, "A lot of depreciation that we saw recently was sentiment driven, rather than being the actual market action.

"That sentiment needs to reverse and the moment we see that GDP has bottomed at 4.9 per cent and inflation has been contained, the sentiment will change for better and that would reflect in currency as well.

Joshi also said that on macroeconomic level, india's numbers look much better than what they were a few month ago or even a couple of years back.

"There are certain underlying fundamentals of our economy which are not getting reflected in rupee valuation. Currency also reflects the efficiencies you build in your system.

"If we have a static or a low-range moving rupee, then the ability of manufacturers and service providers to create demand would be better and the ability to contain costs would be enhanced.

"That is where China has succeeded and they maintained a static exchange rate for a very long time and they ensured that efficiency is built into their system. Competition is growing and other currencies are also depreciating. In that situation, if we look at a stable or appreciating rupee then we can look at efficiencies," he said.

(Published 15 December 2013, 07:58 IST)

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