Leif Eskesen, Chief Economist, India & ASEAN, HSBC Global Research, spoke with CNBC-TV18, to discuss the results of the latest survey.
Also read: Service sector output drops in December for 6th month: HSBC
Below is the transcript of the interview.
Q: What does the composite Purchasing Managers' Index (PMI) for December threw up for you at 48.1 vs. 48.5 on a month-on-month basis and how would you extrapolate it even possibly to the Index of Industrial Production (IIP) data and maybe even future trends on growth?
A: We had two batches of PMI data. The other day we had manufacturing PMI out which came in weaker than expected, that was driven by weaker domestic demand dragging down output in the manufacturing sector.
Today, we also had the services PMI released, which also dipped further into negative territory below the 50 waterline, so there is also weakness on that front also, driven by a softness on the demand side.
The thing from an economic perspective and if you look at economic activity what they clearly show -- both manufacturing and services PMI -- is that there still is a lot of lingering weakness in the economy.
It is basically tied down to high levels of inflation that is neither positive for consumption or investments. It is also tied down with a lack of progress on implementation of structural reforms, implementation of investment projects here through the Cabinet Committee on Investment (CCI).
I would also say that the high degree of leverage in some sense, the maturity in credit cycle is another factor that is throwing some sand in the wheel. These factors are not going to disappear anytime soon.
I think going a bit deeper into the year we could get a little bit of an upside as maybe some of these investment projects start to kick in. We could potentially get a little bit of an upside to growth from the external side as global economic conditions begin to improve, but I think these more fundamental weaknesses that are somewhat more structural in nature in some sense will continue to be with us for a while.
Q: What is your call on Indian currency? We have seen a bit of depreciation come in. Today you have seen 62.27, though there has been a bit of resilience, even on Friday we saw some resilience, from the lows we saw quite a bit of recovery. How are you mapping out the trajectory for the currency going forward?
A: I think we are probably going to see it hovering around current levels for a large part of the current year. I do not think we are necessarily going to see the gyrations we saw over the summer.
The current account deficit (CAD) has narrowed. The funding conditions have improved. Fed tapering is underway now, but it is more or less in line with expectations. It is going to be done gradually and not as disruptively as some market participants feared over the summer.
So these things to some extent are keeping the exchange rate in check at the moment. I do not really see much upside nor downside to the exchange rate, probably more on balance downside risk, there are still some lingering issues with inflation.
Growth is also weakening now and of course we still have some elections coming up, this could also cause some uncertainty on that front going forward, so maybe on bias there is a bit more of a downside risk to the currency, but I would not suspect repeat of what we saw over the summer.
Q: How would you be placed on what we could expect on the consumer price index (CPI) and wholesale price index (WPI) inflation next week? What are your estimates for the month of December?
A: We could get a little bit of a slowdown in WPI and CPI from food inflation coming off to some extent, but I would not expect much of deceleration relative to current levels, so still in double digits with CPI and little bit down potentially on WPI, but most of it potentially driven by food inflation coming off.
If you look at underlying inflation numbers - core inflation measures for the CPI and core inflation measures for the WPI I do not expect that they would really decelerate, I think they would remain relatively steady and that is the key thing for RBI to look at.
8 percent core CPI inflation is far too high that needs to come down and that is going to prove difficult.
