India’s macro picture weak for now... We’re in a vicious cycle: Ashhish Vaidya, DBS Bank India

How do you assess India's macro economy?
A lot has happened on structural macro front over the last few years, starting from the banking system bad loan cycle, the insolvency resolution process, GST, NBFC funding crisis...

For now, the overall India macro picture looks weak. Due to the slowing economy, government revenue collections have suffered. We have got into a vicious cycle. Slowdown in housing, infra and automobile sectors has had a significant dampening effect on the consumption demand. Higher GDP growth is imperative to reconstruct the country’s fiscal and current account, along with a healthy corporate sector.

What do you look for in the Union budget?
Budget 2020 is an important event to watch for. It will show us what the government’s thought process [is] in terms of fiscal deficit, quality of expenses to support growth and measures to shore up aggregate demand to break out of this vicious downward spiral.

What is eating into consumption demand in rural areas?
Urban reverse migration. When the going was good and both the housing and infra sectors were booming, we were seeing unskilled worker migration from rural to urban. With the current slowdown, we are looking at a reversal of this trend. Unskilled workers are moving back home to save overheads. This means the overall income levels of rural families get impacted and so does the overall consumption pattern. Clearly, this reversal is also hitting the rural consumption when there are large differences in income.

How do you expect the rupee to move this year?
My take is, until the rest of the world does not pick up, India has a window of opportunity. The rupee will continue to be in this range of 70-74 (against the US dollar). If we see some green shoots in global growth and if alternate investment avenues are available to the macro investor, we will likely see a reasonable stress in the USD-INR exchange rate.

What could trigger erosion in the rupee’s value?
The US elections towards the end of 2020 and the Olympics in Japan could well provide that global consumption support. If the latter is the macro outcome, the USD-INR pair can trade in the 75-78 range by the end of the year.

What are the two major events that could trigger volatility in local markets?
The first is the Union budget, which will clarify government’s stance on fiscal management and test their resolve to kickstart the consumption cycle and drive growth. This will surely be a key trigger for any volatility in the local financial market. The next event could well be the RBI’s stance on the monetary and banking system liquidity trends.

How do you look at rate trajectory this year?
While short-term rates look more or less stable, long-term rates can move in the range of 10-50 bps higher from the current levels, of course depending on the outcome of the next year’s fiscal projections, monetary policy and liquidity stance by the Monetary Policy Committee. Higher fiscal deficit can certainly lead to a steeping of the yield curves and the 10-year benchmark yield can steadily move up in the first half of the fiscal with some reversal in the second half, if the overall global and local growth does not revive meaningfully.