Overall war on bad debt is in the right direction, says Taimur Baig

India’s foreign exchange reserves of above $400 billion gives better protection ratios against external threats, but the adequacy is way below compared to other countries in the region. Investors won’t see India in isolation, and therefore it is left to the government and the RBI to formulate better policies to insulate India from portfolio-led volatility, said Taimur Baig, managing director and group chief economist of DBS. In an interview with Anup Roy, Baig says one-day default norm may not be a good idea, but the overall war on bad debt is in the right direction. Edited excerpts:

What is your take on the rupee?

We see further depreciation pressure, not just for the rupee, but emerging market (EM) currencies that are characterised by twin deficits. There are two dynamics at play — strong dollar, increase in rates by the US Federal Reserve, which in the absence of a monetary policy is very aggressive and matches Fed one for one, would manifest in depreciation pressure for these currencies. Another independent factor is that the renminbi has weakened recently on trade war pressures. 

We began 2018 expecting EM FX to come under pressure. We saw oil firming to some extent, we saw Fed rate hike and we saw the dollar was going to strengthen. Those reasons led us to believe that the rupee would be in the 68-69 region in the year. Our view now is slightly more bearish because of the trade war related issues.

In this context, do you think a rate hike is a good counter to fight pressure on currencies?

In the present context, there isn’t a whole lot that a rate hike can accomplish other than being a signalling device. If the rest of the EMs are also facing exchange rate pressure and to counter capital flows if you see many other EMs central banks are raising rates, then the RBI cannot be seen as doing nothing. It may not forestall the depreciation of the exchange rate, but it may stop India from being an outlier.

How much of a protection is India’s $400-billion forex reserves?

India’s external funding cover ratios are a little better than what they were in 2013. But investors are not looking at India in isolation. India is in a continent where there are a lot of countries with very comfortable reserve cover — from China, Korea, Taiwan to Singapore, etc. As a result even though within the last five years India’s shock absorptive capabilities have improved, on a cross-country basis, it still looks rather weak. That’s where the role of policy comes in. What will the RBI or the Centre do to differentiate themselves so that India manages to differentiate itself from outflow pressure?

Taimur Baig, MD and group chief economist of DBS

What is your assessment of the banking system? Is the NPA situation very worrisome and can it disrupt the banking system?

The public sector banks are protected by sovereign guarantee and the private sector balance sheet is better than the public sector. The big revelation of India is the rise of the non-banking sector over the last decade or so. In 2017, majority of the credit generated in India came from the bond market and NBFC. Therefore, it tells me, that between the private banks, the bond market, and the NBFCs, there is avenue for companies to raise funds if they have genuine projects. There is no credit crunch in India.

Do you think banks should have been given more time for recovery?

For the central bank and the government, it’s a very fine balancing act. You have a lot of bad loans, they have to be recognised, but if you have to force recognition in the same span of time, it will create a huge amount of distress in the corporate sector and pull down the collateral value further. If you look at the asset recovery done in the aftermath of the banking crisis in Japan, or after the Asia crisis, many countries had many different models. Under the present circumstances, I think the policy prescription is in the right direction. 

I don’t think that the recognition of haircut and going after defaulters the way it’s been done is somehow poor example, it’s a very good example.