"Repo Rates Beyond 6.5% Would Push India's Growth Downwards; Further RBI Hike Is Unlikely"
-Arjun G Nagarajan,Chief Economist & Communications Manager, Sundaram Mutual Fund
"Phases of Appreciation in the Rupee Expected Only If There Are Sudden Spurts in Financing"

INTRO: A lot is happening in global economics and so is in India. But with RBI repo rate hike and depreciating rupee, the markets as well as the masses are in a tizzy. With the Union Budget just round the corner, we discuss the causes, the advantages and the probable solutions that India must focus on. And we discuss this all with Arjun G Nagarajan, Chief Economist & Communications Manager, Sundaram Mutual Fund who is our face of week at Socio-economic Voices. Speaking to senior journalist Mahima Sharma, Mr Nagarajan shares that India cannot grow without growth in credit and growth in consumption. So which are the sectors and factors that will take nation's GDP upwards? This and more in this exclusive interaction…

MS: You recently shared some views - 'As the dust settles around the RBI policy, three clear narratives stand out.' Can you please break these down for the readers as well as the student subscribers at Indiastat?

AGN: Hello Mahima, great to be interacting with Indiastat and you. Coming on to the answer, the recent RBI policy saw the RBI raise rates, but by a lesser pace, pre-empting a similar drop-in rate hike momentum from the Federal Reserve in the US. Like all central bank monetary policies, every word/phrase used in the policy is important and undergoes a lot of deliberation before it comes into print. The three narratives that I was talking about were the threads that stood out clearly from the RBI policy: growth, inflation and rate hikes. On growth, the RBI’s H1 average for FY24 stood at 6.5%, implying that the full year growth numbers for FY24 could hover around this number; probably with a downward bias given the backdrop of a global growth slowdown. On inflation, the RBI continued to hold on to its narrative of inflation-focus and a subtle shift was witnessed towards core inflation from that of headline inflation, in the policy. The RBI said it would have an ‘Arjuna’s eye’ on inflation, suggesting that this focus would not go away in the near future (remember, this is an inflation targeting central bank). On rates, the RBI sounded conservative and left the door open for more rate hikes. The RBI has seen to transmit around 50% of the Fed’s hikes and going by this, a one-and-done rate hike of 25 bps appears to be reasonable, given that the markets expect another 50 bps of rate hikes from the Fed.

MS: Amid the US recession, what measures must India take on a speedy and ongoing basis, to ensure that the masses don't feel the ongoing brunt?

AGN: There are two layers to the above question: a US recession and India’s response. Global growth is on a downtrend and key countries in Europe are expected to tip into a recession in 2023. However, despite an elevated probability the markets are attributing to a US recession, we don’t think that the US would experience a recession in the true sense of the word. While a technical recession just means two consecutive quarters of growth contraction, a recession in reality would imply that in addition to economic/business activity, other real indicators like employment and wage/income levels should also witness a sharp drop and move well below their trend levels. As of today, while macro indicators in the US are witnessing some softening, there are no indicators in the US that point at an impending recession. Where does this recession narrative come from? It comes from the markets’ fear that the cumulative impact of the Fed’s rate hikes (and some probability of more hikes) would push the economy into a recession. In all this, one must remember that rate hikes are the key tool a central bank has to bring down inflation, by pulling down demand. Therefore, a soft-landing (no appreciable recession) is more likely to be a base case for now.

In India, we are already witnessing the impact of a global growth slowdown in our export growth numbers. The RBI's rate hikes like you mentioned has had an impact on EMIs and the economy on the whole that one would get to see in the months to come in some moderation in activity variables. However, the RBI seems very unlikely to raise rates beyond 6.5% on the Repo as it would push India growth to much lower than expected levels. India macro and Indian financial markets are not immune to a global slowdown. However, one can say that it is relatively less affected, as its beta to a change in US/Eurozone GDP growth appears to be one of the lowest within the Emerging markets pack. Therefore, targeted spends in the upcoming budget should in itself help. One should remember here that Capex spending has a very high GDP multiplier and greatly helps when the economy turns inward during phases of global growth softness.

MS: China is opening up and the markets are showing a positive run. What's your advice to the investors - classes as well as the masses?

AGN: For investors in the equity markets, we keep highlighting the need to stay invested and not try timing the markets. It is the discipline of investing that makes a big difference to one’s wealth and not being busy in the markets. It’s the difference that is often talked about between business and productivity. Chinese markets saw a sharp uptick that started at the end - October on narratives of easing COVID-related restrictions. However, late December 2022 has seen a concerning narrative of rising COVID-related infections, bringing concerns back to the fore. As I say this, Chinese equity markets have given up all the gains made in December 2022 however holding on to the gains made in November.

This brings us back to the discipline of investing and a 3-5Y time frame one needs to keep in mind for equity investments (mostly large cap). A thumb rule should be that higher moves down the risk profile, the minimum investment time frame should also increase.

Back to China, once COVID-concerns in China ease, the focus would move back to opening up the economy. And as and when this happens, one can expect some commodity price pressures, in proportion to the strength of China's growth pickup.

MS: The global manufacturing industry continued to contract in November 2022, according to the latest purchasing managers' indices (PMIs). What lessons must India take forward to stay a global manufacturing hub, without losing its economic momentum?

AGN: With the Federal Reserve in the US raising rates, central banks around the world followed suit and raised rates towards controlling inflation and some others (like India) to keep depreciation pressure away from its currency. This becomes relevant for the next few months as the lagged impact of monetary policy is set to take effect in macro data across countries. Note here that there is normally a 9M (3Q) lag for rate hikes to impact macro variables and bring down demand (and push inflation lower). Alongside this, most western economies have also started scaling back their fiscal stimulus measures. The impact of rates and normalization of fiscal spends and easing of pent-up demand have all contributed to global growth easing. One can also add the impact of the energy price disruption to the mix.

In all of this, India’s activity levels continue to hold up. This can be clearly seen in its continued increase in PMIs, beating expectations for consecutive months for both manufacturing and services.

India and many emerging economies learnt their lessons in the 2008 financial crisis where they realized that they were too reliant on exports and global growth. China was seen moving soon after attempting to turn inward. India on the other hand, is currently well aware of the need to shift inwards as much as possible and reduce the import intensiveness of its industries. The Production Linked Incentive (PLI) schemes across sectors are aimed to hedge/insulate India for these very circumstances.

MS: How should one look at the Indian rupee? Will there be a phase of currency appreciation India can witness in the near future?

AGN: India is an emerging market (EM) and its currency is an emerging market currency. There are two broad generalizations that can come from this statement. Firstly, EM economies tend to have higher inflation as they are still in the path of growth with a great amount of development and penetration yet to take place in most of its sectors. More importantly, they tend to have current account deficits as they import more goods/services than they export. In India’s case, we maintain a deficit with respect to goods and a surplus with respect to services. India’s industries are largely import intensive and therefore, India's growth is also import intensive. This means when India grows, our imports also tend to rise. Added to all of the above, India is dependent on crude, to the extent of roughly 30% of its imports. The deficit India maintains on goods (more imports than exports) is not something that will go away anytime soon.

The last nearly three decades have seen an average annual depreciation of the rupee, north of 3%. There have been periods that experienced a sharp increase in financing through both FDI and FII flows that more than took care of the deficits, leading to an appreciation of the currency. However, with no paradigm shifts expected on trade in the near future, it would be reasonable to assume that this 3%+ depreciation of the rupee continues. Phases of appreciation can come only if there are sudden spurts in financing. One such could be if Indian bonds are added to the global bond index, bringing behind it a surge of inflows.

MS: G7 price cap on Russian crude, OPEC production cut. Please break this down for the readers to understand not just what it means for India but also how must the country's economy stride ahead in its oil production and consumption sector?

AGN: Attempting to drain Russia of its resources funding the war, early December, the G-7 countries, Australia, and the European Union decided to impose a price cap on Russian crude transported by ships. This is over and above the existing embargo by the EU on purchasing seaborne Russian crude. The cap was set at $60/barrel, with a review every two months. This does not appear to have seen much of an impact on the price of Russian Urals that have anyway been trading below this cap since.

For India, this would be a positive, given that we are clear to prioritize our internal energy security over any sanctions or price-cap announcements from western economies; giving us continued access to discounted crude.

MS: The onset of the Russia-Ukraine war gave rise to a number of narratives, one of which was the breakdown of the dollar hegemony. Can India EXIM trade shift sharply away from the dollar in the years to come?

AGN: India moving away from the Dollar is a narrative one keeps hearing in the media. The narrative of de-dollarisation picked up post the Russia-Ukraine war and most EM countries were seen finding an economic incentive to nudge their way to import Russian energy and commodities. It is very important to view this in perspective, so as not to get carried away.

Crude and metals are largely traded in the dollar and so are most exports and imports across the globe. It is most important to note the efforts of China in this regard. China had some success with de-dollarisation. Research suggests that from settling around 5-7% of their total trade in their domestic currency Yuan, opening up of their capital account and Yuan appreciation posy 2011 appeared to have pushed the number of Yuan trade settlement to 18% their total trade. Further placing this in context, Japan's Yen settlement is roughly just above 35% of their trade. The above numbers help drive the fact that any narrative of appreciable de-dollarisation for India is at least a few decades away; provided India continues on its disciplined path of trying to push for rupee settlement. With Russia, India appears to have made a lot of inroads fairly quickly with respect to rupee trade settlement and is also heard entering into agreements with other countries as well.

MS: What would be the key sectors for investors to focus on, as India grows to become a $10tr economy. And when can one see this target being achieved?

AGN: At the outset, one needs to clear the air around these $5tr and $10tr GDP targets. Firstly, these are nominal GDP targets and secondly, the achievement of these targets are closely linked to how much the rupee depreciates in a particular year against the dollar. If the rupee depreciates sharply in a particular year, these GDP targets would go further into the future.

Therefore, a more reasonable timeframe for India to touch $5tr would be FY28 (and not FY25) and FY36 for touching $10tr. This would then mean that an Independent India would have taken just around 80 years to touch $5tr.

However, the more important point here is that once India hits this size, growing at the same historical growth rate and historical average of rupee depreciation, the next $5tr of GDP addition would take place in 1/10th the time. In short, India would add another $5tr in the eight years after, in FY36.

India cannot grow without growth in credit and growth in consumption. Therefore, two sectors that would have to drive this growth in India's GDP upwards, would have to be financials and consumption.

MS: As the world stares at a probability of a recession, will the global economy turn more inward, protectionist and decoupled in the years to come?

AGN: Globalization is a word that got used post 2000. After this, the global economy has only become more globalized than less. Every country in the world is now more interdependent on the other for goods, services, raw materials, logistics etc. And the clichéd phrase ‘when the US sneezes, the world catches a cold’ continues to remain relevant. India's exports remain dependent on US economic activity and global markets on the whole are more bothered about whether the US would move into a recession or not.

When it comes to financial markets, the relationship is even tighter. For more than the last two decades, Indian equity markets have tagged the US, directionally. Being an EM, India returns tend to be higher and therefore India also trades at a premium to global equity markets. The above, has provided that India Macro remains strong. This multi-decadal relationship between India and US equity markets can be clearly seen in this chart that plots 12M trailing returns of the Nifty against that of the US S&P 500.

MS: What should India look forward to in the coming BUDGET 2023

AGN: The key point to note on the upcoming budget is that it would be the most relevant one before the nation goes for the 2024 general elections. Therefore rural, education and health are most likely to be the key focus areas. This would be in addition to the existing and continued focus of the central government on capital expenditure.

The budget is also likely to see a drop in the fiscal deficit as a percentage of GDP, as the government attempts to gradually undo the COVID-related excess spends. Recall here that total spending from the center in the union budget has jumped from Rs.27tr in FY20 (pre-COVID) to Rs.39tr in FY23, a 46% jump over three years. From a fiscal deficit of 6.4% GDP, the upcoming budget is most likely to settle lower around 6% of GDP.

And from expenditure being 13% GDP pre-COVID in FY20, spending is most likely to settle at 15% GDP in FY24. This would imply that a part of the bump-up in COVID-related spending would still remain in the budget numbers, while the economy has just completely normalized from its COVID-related impact. A back of the envelope calculation would suggest that the budget would still have roughly 2% GDP of spending at its disposal to divert to the above-mentioned areas of spending (roughly Rs. 6tr).

MS: Finance Minister Nirmala Sitharaman has been named among the world's 100 most powerful women. Ranked at number 36, she has made it to the list for the fourth time in a row. What’s you take as an economist on this achievement and what is the future ahead for women in this field which was earlier dominated by men?

AGN: Yes, that is indeed good news; and may I add that she was in the top100 for the fourth consecutive year.

Ms.Sitharaman is a formidable lady and I am very happy to note that the focus over the last few years has fallen squarely on meritocracy, rather than anything else.

In the Indian professional space, with more education and participation from women, gender is becoming a thing of the past. Not just Ms.Sitharaman, but there are women for nearly all walks of life that are making strides in various fields. Education, skilling and higher participation of women in India’s labor force would greatly help India charge ahead on growth.

This decade would be India’s time in the sun. India’s domestic growth story, differentiated growth and importantly the demographics opportunity are pointers that stand out.

About Arjun G Nagarajan

Arjun G Nagarajan works at Sundaram Mutual Fund as the Chief Economist and Communications Manager. With an initial 3 years in academics, Arjun's career in the equity markets span over 12 years, of which he has spent over 10 years at Sundaram.

Arjun was a part of the NITI Aayog's discussion with economists on topical issues over the last few years. In January 2020, Arjun participated in a pre-budget roundtable consultation with the Honorable Prime Minister of India, to discuss the policy measures for budget 2020-21.

Arjun holds a Bachelor’s degree in Commerce, MA in Economics and MPhil in Economics from the University of Madras. He also holds MSc in Economics and MSc Finance & Investment degrees from the University of Exeter, UK.

About the Interviewer

Mahima Sharma is a Senior Journalist based in Delhi NCR. She has been in the field of TV, Print & Online Journalism since 2005 and previously an additional three years in the allied media. In her span of work she has been associated with CNN-News18, ANI - Asian News International (A collaboration with Reuters), Voice of India, Hindustan Times and various other top media brands of their times. In recent times, she has diversified her work as a Digital Media Marketing Consultant & Content Strategist as well. Since March 2022, she is also an Entrepreneurship Education Mentor at Women Will - An Entrepreneurship Program by Google in Collaboration with SHEROES. Mahima can be reached at

Disclaimer : The opinions expressed within this interview are the personal opinions of the interviewed protagonist. The facts & statistics, the work profile details of the protagonist and the opinions appearing in the answers do not reflect the views of Indiastat or the Journalist. Indiastat or the Journalist do not hold any responsibility or liability for the same.

indiastat.comJanuary, 2023
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