Upasana Chachra of Morgan Stanley discusses a broad range of subjects in an exclusive conversation with Moneycontrol, from the Fed's rate-cutting trajectory to India's bond markets.
Upasana Chachra, Chief India Economist at Morgan Stanley, has a more optimistic opinion on the durability of PM Narendra Modi's 3.0 administration with coalition partners, notwithstanding the doubts of certain quarters. Under Modi 3.0, she envisions a stable government that would continue to concentrate primarily on capital expenditures and employment growth.
In a special interview with Moneycontrol, Chachra shares her opinions on a wide range of subjects, including what she thinks Modi 3.0 will bring, India's development prospects, the Fed's plan to lower interest rates, and more. Revised passages:
Q: Although the results of the election were unexpected, it seems that things have cooled down. However, what do you think of the economy's reaction to the coalition era's return?
Upasana Chachra: We have seen the results of the election; they are, I believe, almost fully assimilated, and there is evidence of stable governance and policy consistency. In our base scenario, we considered a stable administration and policy continuity when considering our predictions and macro outlook.
Even yet, it comes as a bit of a surprise that there has been no discernible shift in the stability or manner in which the administration operates. Likewise, we continue to have a positive prognosis for India's future, both in the short and medium terms.
Will the emphasis now be on boosting consumption, which has been lacking recently? will you anticipate that the administration will continue to lean more toward populist policies and give rural stress relief top priority instead of pushing through the manufacturing-led changes at the same rapid speed?
Upasana Chachra: Our opinion is that the government's playbook won't alter from what we seen during the previous term. We do believe that capital expenditures and job creation will remain the main areas of concentration since, in our opinion, they are more durable means of generating growth and a positive feedback loop in the economy, particularly in light of India's enormous labor surplus. In my opinion, the government should prioritize creating highly productive employment, particularly in the non-farm sector.
Given the improvement in fiscal dynamics over the budget predictions, we think the government will continue to prioritize capital expenditures. Although there is considerable freedom now, capital expenditures and financial prudence will always be prioritized. Better targeting in redistributive expenditure is something else we anticipate.
Do you see private capital expenditures taking the lead in the investment cycle going forward, given that government capital expenditures have been the primary driver of the cycle up to this point?
Upasana Chachra: Public capital expenditure backed the investment in the early post-COVID years, and this was undoubtedly a good decision. However, we believe that private capital expenditure and capex will increase going forward. There are some early indications of that recovery already, and as the economy continues to expand, I believe that end demand will continue to hold up, capacity utilisation rates will rise, and corporate and financial sector balance sheets will become cleaner. These factors will combine to create the conditions necessary for capital expenditure to increase across a wider range of industries.
In the second part of the fiscal year, private business capital investment signals should become more noticeable. Although I believe that public capital investment is still strong, more responsibility now has to fall on the shoulders of private corporations.
Q: And let's not forget the just released growth numbers. Although we have exceeded the 8 percent threshold for FY24, the GDP and GVA still differ significantly. How do you interpret that?
Upasana Chachra: You're right, there is a problem. For the last few quarters, the GVA figures have lagged behind the GDP. The mathematical calculation method is somewhat to blame.
Still, I believe that as we approach FY25, the margin will close. According to the interim budget, subsidies are probably going to be even less, and tax revenues are probably going to keep growing at the same rate. The economy's underlying growth momentum is still rather strong, as seen by high-frequency data indicators such as GDP and GVA.
Q: In light of the World Bank's revision of their FY25 GDP prediction, will you be changing your growth projection for FY25 and FY26? The RBI has increased its own projections from 7% to 7.2 %.
Upasana Chachra: We project 6.8% GDP growth in FY25 and 6.5 percent GDP growth in FY26.
What economic threats affect India the most?
Upasana Chachra: In terms of cycles, there are more international than local hazards. Risks include sudden spikes in the price of commodities globally or weather-related disasters that impact food inflation. Nonetheless, there is less susceptibility now that macro stability indicators are stronger. We must monitor global commodity prices, crop sowing, rainfall, food inflation, and growth worldwide, particularly in the US. Our base scenario assumes no significant US slowdown or recession and continuous global growth.
What impression does Fed Chair Jerome Powell give us? Three rate decreases were announced at the beginning of the year, then to one. Powell hinted at a possible more aggressive rate-cutting path for the next year. When will the one rate reduction be implemented, in your opinion?
Upasana Chachra: If GDP and inflation numbers hold up, our US team anticipates a rate reduction in September. They predict that this year might see three rate reductions, with inflation slowing and growth gradually slowing.
Q: OPEC has projected a high level of demand and plans to begin raising output in October. Crude is now trading at around $82 per barrel. Where do you think crude will end up in the medium run?
According to Upasana Chachra, our team believes that for the next three to four quarters, oil prices will be range-bound between $80 and $90 per barrel.
Q: FMCG rural volume growth has surpassed urban volume growth for the first time in five quarters. Do you believe that this pattern will continue, particularly in light of the predicted above-average monsoon this year? In the cycle of consumerism, where are we now?
Upasana Chachra: We think there would be less of a demand divide between rural and urban areas. Due to the pandemic, rising inflation in 2022, and the monsoon's poor performance last year, demand in rural areas has been sluggish. Rural demand should increase now that these interruptions have passed and the advantages of stronger employment growth and urban demand are starting to filter down. Data on two-wheeler sales and FMCG sales show this. Better monsoons and agriculture revenues should help this trend continue.
Q: The bond and equities markets saw volatility on counting day. The yield on a 10-year note crossed 7 percent and hasn't decreased. What is your opinion on the direction of the 10-year yield, particularly in light of the addition of JP Morgan bonds?
Upasana Chachra: The RBI's larger dividend and improved fiscal dynamics balance the supply and demand for bonds from a fundamental standpoint. The addition of bonds to the index generates fresh demand. The budget will be the main event to keep an eye on in the near future. Bond yields will show a more distinct pattern as soon as the budget is clear. We anticipate fiscal discipline, supported by demand from bond index inclusion, with a budget deficit of 5.1 percent or less.
Finally, when do you think India's rate-cutting cycle will begin? Do you anticipate at least one rate drop this year or next year, despite the fact that many analysts believe the Indian economy is in a Goldilocks scenario?
Upasana Chachra: This year or next, we do not anticipate a rate reduction. The framework does not support a rate reduction given the strong growth and growing neutral real rates. Numbers related to growth and inflation are important to monitor. It is difficult to defend a rate drop any time soon given the robust increase in both GDP and credit.
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