Inflows from abroad could ensure India ends the year with a surplus balance of payments. A gaining rupee is unlikely to hurt exports, as currencies of competing economies are also strengthening, Hemant Mishr, managing director and head of global markets for South Asia at Standard Chartered Bank tells Sumit Sharma. Edited excerpts:
India’s current account deficit has been widening and may widen further. What implications do you see?
The trade deficit has been trending up. One could see further deterioration if oil was to rise substantially. We are revising our current account deficit projection to 3.4 per cent of GDP by March.
The dollar may also weaken in the last quarter this year and the first quarter of next year. Looking at trade and current account deficits, the natural reaction is, the rupee is going to weaken. But one will have a BoP (balance of payments) surplus because the capital account looks so good. The portfolio flows and qualitative shift to both equity and debt will negate the current account impact. We expect the rupee at 44 per dollar by March. (But) The joker in the pack could be oil.
Is the strengthening of the rupee sufficient to begin hurting exports?
I don’t think so. What matters is relative overvaluation. In real effective exchange rate (REER) terms, we are only overvalued by 12 per cent. A lot of REER overvaluation will correct itself once inflation comes down. At current levels, it’s not hurting exports because currencies of competing economies have also appreciated substantially.
There’s REER overvaluation and the interest and inflation differentials between India and the West are significant. Should the Reserve Bank of India (RBI) initiate steps to slow inflows?
It’s a controversial theme. It has to do with absorptive capacity of the economy, without leading to serious distortions – either in exchange space or any other asset markets. We need capital inflows to finance the deficit and a host of infrastructure and capital goods. The India story is slightly different from a Brazil, Chile or Thai story. If you change your position on what kind of capital is welcome or not on a frequent basis, it’s going to hurt investor confidence. We need to keep our doors open.
What I expect is a tale of two worlds. The West is flush with liquidity, with a dearth of investible opportunities, and a lot of that liquidity is going to flock to the East and other emerging markets. We just need to insulate ourselves from disruptive flows, or hot money. The recent relaxation in FII inflow in debt is a first step towards that messaging. You want strategic investors and long-term flows with a commitment, rather than the ‘in-out’ kind of investors.
What kind of demand do you see from overseas investors in Indian bonds?
Too early to say. The five-year lock-in period is the first, and a lot depends on operational guidelines from RBI and Sebi. G-sec (government securities) will see a lot of demand. We could be pleasantly surprised by the end of the year numbers on fiscal deficit. Corporate debt may take a bit longer.
Is this move ill-timed? We are seeing so much inflow and the rupee appreciating.
I was surprised when it came out. The one on corporate debt makes sense, while the one on G-sec makes less sense to me, as the borrowing programme for the rest of the year has been de-scaled. Tax collections look good and there is a probability the government may not need to borrow more. On corporate debt, it is better timed, as one will see a lot of infrastructure-related demand and one needs to get a better category of investors.
Could this move hurt the fiscal deficit discipline, as one is getting easier extra funds?
I don’t think so. The government has been very prudent about it. It does not matter who the investor is. The fiscal balance sheet would look the same even with a new set of investors. And, this is far too small in proportion to the G-Sec market to have a substantial impact on government’s borrowing cost.
Is RBI done with increase in rates?
A section of the market feels RBI is behind the curve, I think otherwise. Inflation should fall to 6-6.5 by the year end, and then real interest rates will be better than what they are. We also need to keep a sense of what the rest of the world’s stance is going to be. A 50-basis points rise over a few reviews is called for, if only to ensure growth is more sustainable and inflation is seen as controlled.
