Greece's exit from Eurozone to hit banking sector: F&C

Below is an edited transcript of Chowdhury's interview on CNBC-TV18. Also watch the attached video.

Q: What's your hunch on Greece? Will it really get out of the euro or will it pull back at the last moment?

A: Greece is stuck between the devil and the people. See I'm afraid. The attempt by the current biggest party to try and form a collation government is not likely to succeed. The result of that is probably we are going to have elections again in June.

Q: If Greece does go out of the Euro, how do you think that investment is actually going to pan out? What is the domino effect of something like this or something so adverse happening?

A: No one really knows what the effect is. But, the near term effect is clearly very bad for the Greek banking sector. People say that essentially the Greek banking sector would be bust in that scenario. That clearly is very bad news.

Question then is, is it contagion effect across banks, across the region. Obviously policy makers are to some extent prepared for this over the last year or so. I am sure they have been talking about it, it was in the corridors of power. But, I think if it is a disorderly default or disorderly exit, its going to be much more difficult than it’s agreed to be.

Q: What are you gearing up for in terms of a period of uncertainty? Does it last the next six months or till the re-poll in Greece?

A: I think there are a couple of scenarios. The first scenario is compromise on all sides. The euro zone leaders basically, sit down with the Greek government and may be renegotiate some of the austerity measures, although I think it will be tinkering rather than anything else.

On the other side, the Greek authorities will say, we want some concessions from this. The problem at the moment is Greece doesn't have a government. So, who should the euro zone leaders actually negotiate with?

Q: How will risk assets behave? Are you going to see further bleeding till the Greece issue is resolved? Do you see major outflows from emerging market equities?

A: What we have seen over the last week is a fact that risk aversion has increased again. I think that applies to all asset classes, not just emerging markets. But it's true. I think when you have a situation where people get worried, emerging markets are often the first place where they look to sell.

Q: What is the outlook on India? There was some certainty which came in on the tax front sometime back, but will the veining global risk-off actually see FII exit?

A: It's encouraging that there are some developments on the tax front but by no means, in my opinion, are those tax issues being resolved. There are still uncertainties regarding taxation in certain areas. The delay has just started, its just delayed things for a year.

I think FIIs are frankly not going to do very much at the moment. Firstly, because of the risk aversion increase and secondly, because there is still quite a lot of uncertainty in terms of the macro-economic picture in India itself.

Q: Besides equities, it's the rupee which is marring sentiment in India. What is your outlook on it?

A: Obviously, the market is telling you something. The market is saying the macro position in India is not great. I know growth is still pretty decent by global standards. But, the key issue is the fiscal deficit and inflation. Unless the market is satisfied that those two issues have been dealt with, I think the rupee can continue to trend down.

Q: Is there a point on the Sensex or Nifty where you will deem India attractive on the valuations front?

A: Well it's pretty attractive now. But, I wouldn't be jumping on the table and saying you have got to buy it today. It's pretty attractive on historical basis and relative to earnings. I suspect, if it was 10-15% lower, it will become very attractive, particularly the private sector companies who are delivering pretty good growth in many cases.

Q: We are already seeing commodities bleed a bit, how much worse can it get for crude or metals?

A: The one good thing from India's perspective is a fact that there is a likelihood of oil prices coming down. Firstly, because I think the Iran situation has kind of calmed down now. Generally, demand is not great and supply is abundant.

From India's perspective, I think the fact that the oil price will come down a bit is pretty good. I think for commodities generally, the situation in China is that demand is still quite weak. I don’t see commodities being very strong.