Robert Prior-Wandesforde, Senior Asian Economist, HSBC Holdings, said the problems in the US are not over. “We think the Fed will have to do more and our US economist is looking for rates to come down eventually to 1%.”

He feels the Indian economy is perhaps a bit more vulnerable than a lot of people believe. “The key lies with the domestic economy. The impact of the interest rate rises, delivered by the Reserve Bank of India, or RBI, are still coming through to the economy. It will continue to come through during 2008 and that will slow growth in India.”

Excerpts from CNBC-TV18’s exclusive interview with Robert Prior-Wandesforde:

Q: What did you make of the 75 bps cut that came by and what do you expect the Fed to do now?

A: We were looking for a 100 basis points reduction. So, we are slightly surprised by the 75 basis points move. Nevertheless, this is another big cut and it should be seen in some perspective. We have had a 300 basis points reduction since the first cut in September. We have had 200 basis points cuts this year alone and that together with all these credit facilities that the Fed has opened up like repos, government tax rebate, and so on and so forth. So, a lot has been thrown both from the central bank and the government at this problem.

Where do we go from here on the Fed? We don’t think the problem is over. We think the Fed will have to do more and our US economist is looking for rates to come down eventually to 1%.

Q: Actually, the Fed speak is a little more bearish than one would have expected. Clearly the outlook is on growth and inflation. The language is quite clearly much more if you can call it dovish or much more serious than it was on January 30. Therefore, what are your expectations from the economy itself? What kind of recession are you looking at in the US and what kind of financial trouble?

A: This clearly is an extremely serious problem. It is going to take a long time to work through. There are dangers, and it is obviously going to get worse before it gets better. Our global team is basically expecting a fairly long drawn out period of low growth. We are looking for just 1.5% growth this year and 1.2% growth in 2009.

So, we are expecting a long period of softness where the rate cuts obviously take a fair while to actually work through and deliver the kind of pickup that we are all waiting for. We are still many months away from that unfortunately.

Q: How many months or quarters of actual contraction are you looking at? Taking up from your 1% forecast for the Fed Funds, what would be the call on the dollar-yen and for that matter even the dollar-rupee?

A: In terms of the shape of the recovery, obviously a lot of people talk about U shapes and L shapes and so on. We have a W shape in terms of the way we see the US economy. They are going to be slowing down right now. We see a bit of a lift around the middle of the year with tax rebates coming through. Those we expect to be spent, but then the economy I suspect will slowdown again. The fundamental problems won’t have been resolved and then it won’t be until we are well into 2009 that we get hopefully the final recovery picking up.

In terms of the dollar against this background, obviously it is hard to be particularly optimistic. Our currency guys are suggesting that we could see a turn in the dollar perhaps some time towards the second half of this year, just because so much bad news will have been priced-in. We are looking for the dollar to strengthen against both the yen and euro, not necessarily against the Asian currencies, but against the yen and the euro, where there is still a bit more by way of economic downgrades to come through. We see those currencies softening against the dollar later this year.

Q: What about the Asian or the emerging market pack? What response do you see from these markets to what is happening in the US, the recovery pattern and the gains that you anticipate?

A: Ironically, the Indian economy is perhaps a bit more vulnerable than a lot of people believe. We expect most other Asian economies to do well. That may seem odd given the relative exposure of both India and the rest of Asia to the US.

The key lies with the domestic economy. The impact of the interest rate rises, delivered by the Reserve Bank of India, are still coming through to the economy. It will continue to come through during 2008 and that will slow growth in India.

We are looking for 7% GDP growth in 2008-09, whereas domestic growth for the rest of Asia is being supported by still very helpful policy conditions. Policy is still very loose throughout much of the rest of Asia. Real interest rates are negative in many cases and fiscal policy is being eased significantly as well to keep growth going.