RBI likely to further tighten monetary policy: JPMorgan

Kalpana Morparia, CEO, JP Morgan is expecting further tightening of monetary policy. In an interview to CNBC-TV18, Morparia said that direction of cutting deficit is a good outcome of the budget.

Talking furthermore on the budget, she said that allowing foreign institutional investors (FIIs) to invest directly into mutual funds is positive.

Morparia is seeing strong debt flows in India.

Below is the verbatim transcript of Morparia's interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying videos.

Q: What did you make of what the union budget delivered or did especially in terms of capital market point of view?

A: There were two transformational ideas in the union budget. First one is the cash transfer of subsidies. This is truly a path-breaking effort and once that gets achieved, whether it gets achieved in the course of this year or next year, is relatively a moot point.

It will change the arithmetic of the budget this year slightly if it doesn’t happen, that indeed is going to be a transformational initiative.

The other is, allowing foreigners to invest directly into mutual funds. That in itself is not going to bring in a whole lot of money but, I see it as a forerunner of allowing foreigners to buy stocks directly rather than going through the convoluted structure of P-Notes.

The entire initiative in terms of bringing some of the long pending bills in financial sector reform is again very good ideas that have been bought in. The trend direction in terms of cutting the budget deficit was a good initiative.

Q: What are your thoughts on the FII relaxations, which have happened on the debt side as also on the infrastructure debt side? Would that manage to attract a lot of capital?

A: My sense is, there is definitely appetite for debt in India. A long only fund recently told me, that they have raised a long-term emerging market debt fund. They got more demand than they had appetite for and certainly, India was a big part of that demand.

There is a demand and there are also several challenges. In the infrastructure projects, in the initial part there are a lot of construction related risks associated with that debt. I don't think the FIIs are naturally the best investor in terms of assuming those risks.

We need to find a structure where, the people who are able to better absorbed this risk appetite of the construction phase assume that and then there is take-out financing coming in from this long-term debt providers.

The 5% withholding tax relaxation is good for infrastructure bonds that in itself calmed some of the concerns that people had on a higher withholding tax. There is appetite but a lot of work needs to be put into coming up with appropriate structures.

Q: How much of the bridging of the current account deficit will happen through foreign flows this year, in fixed income and in equity because that is the big question which a lot of people are trying to figure out the answer to?

A: If you look at the flows in the current year, the debt flows have been very strong. Until about eight days ago, the net foreign flows into the country were positive despite the significant negatives on the equity side. Given the current interest rate scenario, on a net basis, we should soon turn positive primarily because of debt flows.

Q: On the point you were making earlier about allowing FIIs to invest in mutual funds, the criticism seems to be that many of them do have arms abroad dedicated to investing in India and this may not necessarily pull the kind of money interest one is hoping for?

A: There is a lot of long-term money out there. Under appropriately structured debt vehicles this money can definitely find its way here. There are many challenges in terms of finding out the best marriage between the risk takers for the initial phases of these projects and people who have a appetite to provide long-term fixed rate money. I would question a statement that says that we don’t think there is appetite.

Q: The parallel line of cousre is the primary market appetite and this time again almost Rs 40,000 crore has been earmarked in terms of divestment proceeds. What do you think the pipeline looks like for this year, both government and private?

A: The pipeline indeed is quite strong at Rs 40,000 crore — so more than USD 9 billion in government divestment. The last that we checked, there was close to USD 9-10 billion pipeline of private sector capital raises that would coming in. Clearly, with this market sentiments - concerns on high oil price due to tensions in the Middle East region, our own inflationary pressures - I don’t think you are going to see anything coming in the immediate short-term.

Q: How do you read the bond market for now there has been some relief because of the fiscal deficit communication but do you think this will hold and what we saw just before the budget could be a cap for the benchmark bond yield?

A: At least over the next six-eight months, we don’t think the bond yields are going anywhere. If indeed some of the initiatives that the budget had outlined go through, I don’t think one is going to see any significant pressure on the bond side. The short-term interest rates every year spike between December to March and one can hope that to cool a bit in April.

Q: What do you expect to see from the RBI now given what the government has outlined with its net borrowing programme, do you think they will sing a less hawkish tune or go a little easy from here or do you think it does not change too much on their monetary policy trajectory?

A: The monetary policy trajectory will continue to tighten. The only difference between their policy announcement last time and now is the geopolitical developments which have had such a huge impact on the oil price. That is the only additional wrinkle that they will have to address. Wherein, they look at further tightening because indeed oil at these elevated prices if sustained over a long period of time can be a big growth dampener.