India will be second fastest growing economy by '10
India will be the second fastest growing economy next year with growth rate pegged at 4.9% for FY’10, but weak government finances would be a major challenge to bond yeilds, growth as well as ratings.
By Gayatri Nayak, ET Bureau |
India will be the second fastest growing economy next year with growth rate pegged at 4.9% for FY���10, but weak government finances would be a major challenge to bond yeilds, growth as well as ratings according to a report by Credit Suisse.
Speaking to ET Cem Karacadag, regional economist at Credit Suisse, said, ``India���s economic growth prospects appear better than most other economies in Asia. We expect real GDP growth of 4.9% in FY20101, with investment likely to decide where in the range of 4.5-5.5% the economy will grow. But financing constraints will limit investment growth and fiscal flexibility in FY2010 (April 2009 - March 2010) and challenge India's bond yields, ratings
and growth.������
Rating agencies could lower India���s ratings in the second half of FY2010 if public finances do not improve, Mr Karacadag, said. ``The agencies could cut their ratings if the fiscal deficit widens as we expect, without any prospect of the government reining in the deficit from FY2011 onwards. However, we do not expect Fitch and S&P to cut their investment-grade ratings on India in the near term.������ he added.
The report notes that government financing requirements will put upward pressure on government bond yields, particularly in the second half of FY���10, unless growth in bank credit to the private sector decelerates more sharply. Even if the RBI increases its secondary market purchases of government bonds, interest rates are likely to be volatile, reflecting the opposing forces of high government debt issuance, RBI open market operations, and banks��� potential reluctance to increase duration.
The tight financing situation gives the government little margin for expanding policy and, in fact, may force the government to run a smaller fiscal deficit than we are forecasting.
Credit Suisse has estimated that the ratio of general government debt to GDP will rise to 78% in FY���10 from 77% in FY���08. At these levels, the Indian government is one of the most highly indebted among emerging market sovereigns (and the highest in Asia).
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it has also said that monetary easing is unlikely to spur credit growth and domestic demand. Lending rates respond to policy rate cuts and lower government bond yields with a long lag. This is partly because a big part of banks��� deposits is in time deposits with an average maturity of around two years and thus take time to re-price down. Rates on savings deposits, which account for the balance of 13% of total deposits, are already fixed at the government-administered rate of 3.5% and there is no scope for banks to re-price them unless the government cuts the administered rate.Balance of payments flows should be neutral for the INR, with policy rather than flows likely to drive a mild depreciation of the rupee towards 52 rupees per dollar in 2009. Through Q3���08, growing remittances partly offset the widening oil trade deficit, with the current account registering a 2.5-3% of GDP deficit in FY���09 on its estimates. It expects the current account balance to stay close to balance in FY���10 thanks to the sharp drop in oil prices partly offsetting the decline in exports. Regardless of our point estimate, the current account balance will not be a decisive factor for the rupee in FY���10.
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