Banks have raised $4 billion (Rs 18,708 crore) since January 1 in overseas bonds, compared with no money in the same period a year ago. Rising capital inflows will also strengthen the rupee to 44 to a dollar by March, says Munish Varma, head of global markets at Deutsche Bank, India in an interview with Sudeep Jain. Edited excerpts:
How have FII (foreign institutional investors) flows been over the past few months? Do you see any volatility in inflows?
Flows have been quite positive. There has been some volatility in the sense that some months have seen less flows than others but generally, the trend has been one way i.e. money in to India. Our expectation is that flows for the calendar year 2010 would be in the region of $16 billion (Rs 74,382 crore).
Are Indian stocks over-valued, as some analysts say?
I think the perception is that markets are fairly valued and I don’t think anyone expects a significant sell-off. The question is what are the drivers that will cause them to go higher from here? One of those drivers will be foreign flows, given that India’s growth rate is far superior to those of other countries. Also, India has a demographic advantage and consequently a robust domestic consumption story, which is very strong.
How much of a concern is rising interest rates and a higher inflation rate?
Rising rates are well discounted and priced in. As long as rates go up in a calibrated manner, there should be no panic in the equity markets. Having said that, a rising rate environment does act as somewhat of a deterrent to runaway equity markets and there could be some consolidation around these levels but that’s only rational, given India’s outperformance year-to-date compared with some other emerging markets, for example China.
This year has seen 10 foreign bond issuances, of which Deutsche Bank was involved in nine of them. What is the trigger for this spurt in foreign bond issues by Indian banks?
Indian banks came through the crisis relatively unscathed and over the last few years, their balance sheets and as a consequence their funding needs, have expanded. Since January 1 this year, about $4 billion has been raised by the financial sector, compared with no money in the same period a year ago. Issuers’ appetite, coupled with the fact that investors want to buy Indian credit to take advantage of India’s position for global growth and that India credit offers value versus the rest of Asia makes for an attractive demand situation.
Do you think external commercial borrowing (ECBs) volumes will rise further from here?
Yes, significantly. The Reserve Bank of India (RBI) has created a special window for telcos to refinance 3G licence fee through ECBs. That itself should be around $3 billion (Rs 14,031 crore) in the next three to six months. Also, there is limited spare capacity in Indian industry at the moment, so capex is a big theme (steel, power etc) and much of that will get funded through ECBs.
Is there a pick-up in activity in the commercial paper market after the base rate mechanism?
Not yet but we expect that to happen soon.
India wants to borrow a lot of money for infrastructure projects. Do you see anything happening there soon?
There is a lot of investor interest in that area. There is a well-defined financial need from our country’s point of view. Not enough has happened in that area so far. But I do suspect that going forward we will see a lot of activity in that space.
We have not seen too many FCCB (Foreign Currency Convertible Bonds) deals happening. Do you see that changing?
Not really. Investor appetite is just not there. A lot of FCCBs were done at the peak of the bull market and the conversion price was too high. So, it didn’t work out for either the issuer or the investor.
What is your outlook on bond yields?
We think bond yields are likely to grind higher, as RBI tightens policy rates and liquidity remains more in the neutral or deficit territory as against surplus over the next few months. While the government has got a windfall in the form of additional revenues from 3G and BWA auctions, they are likely to be offset by higher subsidy payments. We expect 10-year bond yields to be in the 8.25-8.5% region by the end of 2010-11.
What is your outlook on the rupee?
We are constructive on the rupee and have a target of 44 to the dollar by end-December. The macro environment for risk taking should improve in the fourth quarter, increasing capital inflows into India, and in the process putting pressure on the rupee to appreciate. However, in the immediate short term, the rupee can be under pressure if global risk aversion appreciably increases.
What kind of appetite do you see for upcoming IPOs/FPOs?
The capital markets got a little nervous in May and June because of the European sovereign crisis. Since then, markets have bounced back quite well with a lot of confidence. We have seen a couple of issues, which have been very well received and there will be more activity in the last three-four months of the year. There is significant investor appetite for rightly priced issues by high quality companies.
