Fiscal deficit management may guide Re direction: StanChart

Standard Chartered is the only India listed foreign bank. The FM’s move allows investors to buy Indian listed shares and sell them in the London market and vice versa.

An IDR is a rupee-denominated instrument, enabling foreign companies to raise funds from the Indian capital market.

In an interview to CNBC-TV18, Jaspal Singh Bindra, group executive director, Standard Chartered Bank offers some clarity on the IDR issue from his company’s perspective.

On the current pressure that the Indian currency is facing, Bindra says that in the medium-term, a lot will depend on the fiscal deficit management and the fiscal prudence of the government. “That is something that would be closely watched and the rupee will closely track that performance.”

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: The changes in the rules governing IDRs, the fact that it has become fungible now although it comes with a cap of USD 5 billion, where does it place the IDR? Do you think it becomes a way more attractive instrument?

A: I am sure it has become more attractive for the investors of a particular category which is reflected in the price movement after the announcement.

Q: Is the USD 5 billion cap a major restriction?

A: If we went ahead with the instrument with no limit, we think from hereon it is positive for the instrument.

Q: You are a close watcher of the Chinese economy. There are contradictory views about the Chinese slowdown. The latest PMI numbers did not give that impression but there are enough people who believe that the Chinese slowdown is going to be perhaps be worse than the 7.5% which the political setup in China has put out. Is there more of a slowdown to come?

A: China at best is an engineered slowdown. We do believe that certain sectors will slow but overall our assessment is that they will meet or marginally exceed the 7.5% commitment to GDP growth for the year.

Q: In India, the hawkish people say that if the RBI goes ahead with a rate cut it maybe caught in the wrong foot if inflation rises again and in that some of the bankers point out that the RBI would be better off cutting the CRR to address the liquidity situation which will anyway help the actual rates while the rate cut maybe put on hold. Do you think that’s an acceptable philosophy? Will the Indian system do better with a CRR cut?

A: We have seen a couple of CRR cuts and they have worked in favour of the rupee. It is more a signalling and a sentiment issue. They have kept the interest rate on hold for a while so at least the up movement is restricted now and they are in the best position to judge the trade-off between inflation growth, impending oil prices etc.

Q: You are also in the best place to judge what has been the impact of the slew of tax related news that came in the Budget. What is the sense you are getting from foreign investors? Is there trepidation or is it a cost that they will be able to take in their stride and keep coming if the asset is being basically attractive?

A: I think there is some confusion about that announcement. A lot of people have taken the immediate conclusion that this is a retrospective 50-year change. What is now quite clear to most of us is that it’s referring to the 1962 Act but it’s only valid for a fixed year which itself doesn’t change the principle but at least it gives a more limited timeframe.

As more clarifications are made, the more the most recent one by the Finance Minister on P-Notes, etc the picture will become clearer. But it is fair to say that people are somewhat anxious to find out more in the international community.

Q: Your bank is a key player in debt capital markets and to some extent equity capital markets for corporates raising money out of India. Which markets are attractive at this point in time for Indian corporates to tap?

A: We have always had the advice and guidance to our clients to be as far naturally hedged in their liability raising programs. So, to the extent that they have dollar flows or they have foreign currency flows we would like them to hedge in currencies which are freely convertible and hedgeable. But obviously if one was looking from a rupee comparator then clearly there is an interest rate differential with the US dollar which makes it attractive.

Q: The indication from bankers suggests that the demand from the corporate sector is primarily working capital loans. How far do you think are we from a revival in the corporate capex cycle in India?

A: The capex cycle has been slow for the last several months but it’s a combination of factors that are working against aggressive capex program for most companies. It’s either the two big sectors – power and telecom which have their own specific issues which are coming around.

Mining is now increasingly got into that category. As far as the capital expenditure per company is concerned that hasn’t dwindled that much. It’s just that the mix has been more offshore than onshore now.

Q: What is your sense about how the rupee might move? Do you see it getting more pressured in FY13?

A: In the short-term it’s very difficult to say. I do believe that in the medium-term, a lot will depend on the fiscal deficit management and the fiscal prudence of the government. That is something that would be closely watched and the rupee will closely track that performance.

Q: What is your sense about the growth of the Indian unit of Standard Chartered itself? FY11 was not the best of years for StanChart for various reasons. Do you expect FY12 to see a growth which you couldn’t manage in FY11 and if so what could be the catalysts?

A: As we stand today we would expect us to be back in growth mode but I would say it’s going to be a gradual single-digit kind of growth this year given the uncertainty in the environment macro.

Q: We have not heard much from either the RBI or the GoI on the subsidiarization process for foreign banks which have brand status like yours. Have you been privy to any information that you will be excused of capital gains tax if you went from a branch status to a subsidiary status? Is there any development at all on that set of rules?

A: We know as much if not less than what you know at CNBC-TV18. We are very expectant of something happening but nothing that we have heard yet.