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Sep 24, 2012, 10.50 PM IST
Sunil Agarwal of Deutsche Bank and Neeraj Gambhir of Nomura India speak about the impact of reforms on the equity market and rupee.
A lot of reforms have been announced over the last few days like diesel price hike, cut in withholding tax on external commercial borrowings (ECBs), and foreign direct investment (FDI) in retail, aviation.
In an interview to CNBC-TV18, Sunil Agarwal of Deutsche Bank and Neeraj Gambhir of Nomura India speak about the impact of reforms on the equity market and rupee.
Agarwal is quite positive about the equity market. "We have a 20,000 year-end call from our equity research team," he adds.
Meanwhile, Gambhir is still reasonably constructive around rupee. "It does feel like that the momentum can continue for somewhat longer. My guess is about 52-52.5 is the kind of level that currency could potentially target, as long as the news flow from the domestic and global front continues to be supportive," he elaborates.
According to them, withholding tax cut on ECBs is a positive step.
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Below is the edited transcript of the interview with CNBC-TV18's Latha Venkatesh and Ekta Batra.
Q: Is the withholding tax cut going to mean a lot of relief for Indian corporates? Do you see a lot of dollars coming in?
Agarwal: It does mean decent amount of relief for the Indian corporates. Withholding tax has been reduced from 20% to 5%. Assuming a coupon of 5% in dollar terms, it is a saving of 75 bps per annum for a corporate looking to borrow under the ECB window. So, it is a substantial saving for the corporates. This should result in access to cheaper funds for most of the Indian corporates.
Q: Would you agree with that? Is that the sense you are getting?
Gambhir: As far the pricing is concerned, there will be a gain. There will be an advantage to the borrowers because the tax incidence has now come down. As far as the ability to attract more funds from abroad in the form of loans is concerned, I think it’s highly dependent upon the underlying sector and what the dynamics of that sector are and essentially what's the kind of credit risk appetite.
Incidentally, I think we have also seen some tightening of credit spreads across Indian names. There have been fairly decent amount of tightening that has happened on, for example, the CDS spreads for some of the prominent Indian names like State Bank of India, etc. That’s also sort of showing the implication of these moves on the risk sentiment around India credit, though I won’t say that it is fundamentally changed it. I think there is still lot of concerned factors out there, especially around sectors like infrastructure. But it is quite positive at the margin.
Q: Despite the withholding tax being reduced, what is the demand for ECB funding at this point in time? With the reduction of this withholding tax, how much of an incremental increase do you see with regards to ECBs or maybe even infrastructure bonds at this point?
Agarwal: I think we have seen decent demand for India credit from offshore investors. There were concerns. The overhang of a potential downgrade of India credit did slow down things a bit. But notwithstanding that, we saw the Indian financials and banks do a fair bit of borrowing during the last two months.
There has been decent interest from offshore investors in India credit. Now, with the reforms being announced by the government and sticking to the announcements that have been made, the sentiment should improve further. Apart from the reduction in cost due to the savings and withholding tax itself, some positive momentum should build up.
We have seen a constant reduction in credit spreads for Indian names. As a result of that, I think corporate should also benefit. So, last two months, we have not seen too much of corporate issuance. But that should pick up given the withholding tax reduction. As I said roughly about 75 bps of saving on an annual basis is a substantial amount of saving that a corporate can do. So, this could see some borrowing happening.
We have seen the first deal to hit the market after the withholding tax reduction has been NTPC. Today, they have launched the ten year bond and we will see the response during the day as it builds up. So, I am quite positive on this move.
Q: What's the current view on the rupee in-house? How much strength are you seeing?
Gambhir: Our in-house view on rupee was actually quite positive for a short period of time or from the near-term perspective. We were pretty positive and constructive on rupee till atleast December because our view was that QE will improve the risk sentiment.
What rupee has done over the last couple of days has been far more than probably what we anticipated, but the directionality has been sort of consistent with what we had thought. All the three factors i.e. global quantitative easing, the European central bank announcements and the domestic reforms have all contributed towards the risk rally globally as well as the rally in rupee recently.
I think we’re still reasonably constructive around rupee. I think it does feel like that the momentum can continue for somewhat longer. It’s very hard to say exactly where this would stop, but my guess is about 52-52.5 is the kind of level that currency could potentially target, as long as the news flow from the domestic front continues to be supportive, which it has been over the last weekend. Also, very importantly, the global risk sentiment continues to be mildly positive or supportive. I think those are the two key factors that we need to watch out for, but the momentum can probably continue for somewhat longer.
Q: What about FIIs being allowed in currency futures?
Gambhir: At the margin, these are all very positive things. I think the ability of FIIs to hedge themselves onshore has been a very crucial factor in terms of driving the flows. We have seen that, as and when the forward premium has dipped, there is a renewed FII interest in buying debt securities.
If they have given flexibility to hedge between the onshore forward market as well as the futures market, it will definitely be a positive. Though the futures market are only limited until one month in terms of liquidity, but still as and when you see some kind of an arbitrage between the forwards and futures, it will help you play that arbitrage clearly well. So, it is going to be a positive step in the near-term.
Q: Can you just map out what the interest of FIIs have been in terms of long-term infra bonds? How much do you see it increasing with regards to the withholding tax being reduced now?
Agarwal: The withholding tax being reduced doesn’t apply to the FIIs to my knowledge because it is applicable to ECB borrowings in dollar form or infrastructure bonds issued to outside investors. That’s my understanding, unless I am wrong. But the FIIs’ ask of reduction in withholding tax in the rupee investments that they do, it has still not been met, so that is still awaited.
The feeling that we get from FIIs mostly has been that they would want to see that reduction in tax happen, otherwise most of the concentration from FIIs have been in the short end. That needs to change, if the investments in infrastructure have to be attracted from FIIs.
Q: What are you expecting by way of equity interest in the market? With the market showing some kind of an uptake, the reform momentum gathering pace, do you think we could see more QIP/PE kind of interest coming in?
Agarwal: That’s quite possible actually. Our own house view is quite positive about the equity. We have a 20,000 year-end call from our equity research team. So, we are quite bullish on the equity sentiments for the market in India. We have seen a fair bit of that happen in the run up to the announcements and the post-announcements.
The market is in a short correction mode as of now. But I think overall the trend remains bullish. If the overhang of a potential downgrade weathers away, it should spell very positive from an India Inc perspective and we could see flows both in equity as well as in debt form.
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