8% GDP growth not sustainable yet; bond index inclusion may see short-term volatility: Abheek Barua

8% GDP growth not sustainable yet; bond index inclusion may see short-term volatility: Abheek Barua

Abheek Barua, Chief Economist, HDFC Bank, says there is a laundry list of items that need to be addressed before we get on, and climb back onto that 8% to 9% sustainable growth path. We could have a one-off 8% or an 8.5% growth, but that is not what the steady state growth would be. I think the steady state would be closer to 7% to 7.5% in a good year.

There has been a very interesting comment made by the RBI Governor recently that India is at the cusp of a structural shift as far as the economy goes and we could be moving towards a sustainable 8% kind of GDP growth. Do you think that 8% growth is sustainable? And is it realistic? And what would it take to achieve that kind of sustainable growth?

Abheek Barua: I do not think so. I think to get to a sustainable growth path of 8% to 9%, we need to do quite a bit more. We have done a lot on the infrastructure side, but the last mile is yet to be covered so that we can plug into global supply chains. FDI flows have been very weak over the last year or so. It has been a global phenomenon, partly, but we have lost out a little more. So, we need to, work at the ease of doing business piece, which is so critical to attract investors.

Then, we need to get private investment going. And much that the RBI governor would like to bring inflation down to 4%, there is a trade-off, and one of the trade-offs, of course, is that you keep your cost of capital high. There is this kind of received wisdom that the cost of capital does not matter to investments in emerging markets like India, but I think at the margin, it does.

I do not see a strong pipeline of private capex coming through. It is the government that will have to do the heavy lifting for a while. In this area, the RBI could do a bit more. Global trade has its problems. I mean, there is a lot of sort of protection and quasi-protection and trade blocks appearing and we need to sort of get a piece of the action and we need to sort of be a strong partner in multiple supply chains. We have done reasonably well in telecom handsets, but that is not the end of the story.

The PLI has not worked yet for several sectors. We need to get that going so that not only is the domestic market service, but also going forward, we become important players in the global kind of supply framework. So, there is a laundry list of items that need to be addressed before we get on, and climb back onto that 8% to 9% sustainable growth path. We could have a one-off 8% or an 8.5% growth, but that is not what the steady state growth would be. I think the steady state would be closer to 7% to 7.5% in a good year.

What are the inflation risks that you are talking about? Do you think there is a possibility of the rate cut expectation being pushed into CY25 because inflation may turn out to be stickier than what most are estimating?

Abheek Barua: Yes, I mean, we have to see what the Budget does and I think the risk is more from the supply side and that of a patchy and unpredictable monsoon and the way things are going, it is not so much the patchiness of the monsoon, but these adverse climate events which are becoming more and more intense and the RBI might want to sort of keep its guard up there. The rural economy needs a bit of a helping hand. It is recovering, but I think there was enough sign of rural distress, for the lack of a better word and I think that needs to be addressed, that might not be prima facie inflationary if you have a corresponding supply response from the food side and in the budget I think we need to…, I look forward to some strengthening of the supply side measures and initiatives that can keep a lid on food inflation.

The Indian bonds have been included in the global indices and everybody is very happy about it, calling it a watershed moment. How do you see the impact? Do you see liquidity improving in Indian bond markets because of that move?

Abheek Barua: With the bond inclusion, we have seen flows, bond inflows, some of it is front running the inclusion and taking position so that it gains from it and so we would be expecting roughly around two to two-and-a-half billion dollars to come in every month from the passive funds. What we have seen in the context of other economies that have been included in the bond index, China, for instance, is that there is a lot of volatility in the first few months.

This move is liquidity positive because dollars are coming in and the RBI given its stance of trying to manage the rupee and preventing it from appreciating too much, will buy dollars, release rupees, etc, so I think it is unambiguously liquidity positive. But there could be quite a bit of volatility if you go by the experience of other economies. I would think that there is some way for the 10-year bond yield and other yields to kind of drop a little more. I would not get too excited about it because I think a lot of it has already been priced in, but a 6.85, 6.90 to the 10-year looks perfectly feasible.

So, yes, that is the way I see it. I think the long-term gains are important because then India becomes a player in the fixed income space globally and Indian companies trying to raise debt or bonds would get finer pricing and there would be and ultimately the corporate bond market would have more support from FPI investors. So, in the short term. we need to prepare for volatility. But in the long term, the collateral and the second-round benefits are huge and I hope this leads to an improvement in the fixed-income ecosystem, which unfortunately has not taken off that well barring government bonds which have dominated the market.

But this opens up the space for both bond raising, as well as debt raising in general for Indian corporates.

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