Re to climb 30 to $ in 5 yrs: StanChart

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Sending a shudder down the spines of exporters, Gerard Lyons , Chief Economist and Group Head, Standard Chartered believes that the rupee will maintain its unrelenting march and possibly even climb to 30 levels against a dollar in the next five years. Speaking exclusively to CNBC's TV18's Abhijit Neogy, Lyon said India's growth story maybe slower and lower than 8.5% next year.

Excerpts from CNBC-TV18's exclusive interview with Gerard Lyons:

Q: If I can begin by asking you, we have this lovely session of rupee appreciation, this of course hurts India. But given the fact that India is on a growth trajectory of 9% plus, isn't this an inevitability?

Lyons: I think that the stronger currency is inevitable. What seems the concern for many people is the pace of appreciation. I think, one of the challenges here in India and in many other countries, is that people tend to focus often too much on movements against the dollar. The Reserve Bank of India clearly manages the currency against half a dozen currencies. The future outlook is where the rupee reads more in terms of how it performs against the baskets and not just against the dollar.

Q: In terms of the policy responses or the policy intervention, the RBI has come down heavily on that and they have basically tried to manage the rupee within a particular band, but officially they have not announced a particular band and have tried to restrict it within a band. Are you okay with the RBI's response? How from the outside would you view a policy response in this kind of a situation?

Lyons: The RBI is probably facing the brunt of the problem because everything often is focused on the monetary policy and they can continue to try to sterilize their intervention. But I think inevitably currency reserves will rise further and maybe rise significantly further here in India.

Q: Come to the question of sterilization later, but one of the issues is about the capital markets. There is talk about deepening India's capital markets perhaps coming in with more onshore instruments on the derivative side. But the recent clampdown on participatory notes, as it were, has the irked foreign investors. Do you see that as a collaborative response or would you prefer not to criticize that?

Lyons: The big challenge is where India has everyone on the board, there are many different stakeholders; there are politicians representing the farmers, different people in the urban centers, people who have issues about the capital markets. One needs to see deeper, broader capital markets and the foreign investor will continue to come in, because the growth story is incredibly attractive and there is lots of opportunities. Short-term things obviously can change, but what one is looking at is the longer-term potential in India.

Q: As far as the rupee-dollar paradigm is concerned, what is the outlook for the medium to short-term, how do you see the rupee going forward from here? Do you see a rapid appreciation to 30 levels, as some people would have said?

Lyons: I do not see a rapid appreciation in a very near-term, due to political reasons and the fact that the Central Bank is trying to deteriorate the dollar, is not a one-way bet. But having said that, I think the dollar does look vulnerable particularly against the rupee. On a five year view, 30 is easily possible, that's because it's not just the rupee that's going to be appreciating it's the CMY, it is other currencies in that baskets that will be appreciating. But in the very near-term, it would be wrong to think of the rupee as a one-way bet.

Q: What about the US economy, it has been hit by the subprime woes, but would you expect an eminent slowdown?

Lyons: The US economy was already slow and will slow further. Every financial crisis has it own dynamic, each financial crisis depends on the fundamentals, the policy responding confidence. The fundamentals in the US are poor; the policy response is good, but confidence is the big unknown. The US consumers need to spend less and save more. If they do it, it's a soft landing for America, if the US consumer spent less and saved more dramatically quickly, then it's a recession.

Q: When you say the RBI might adopt a tight monetary policy, which it may well, the point is there are certain external dynamics in terms of crude shocks; the interest rate factor for example and already we see industrial output figures are not very rosy for India, specially in the manufacturing segment. All this perhaps points to a slowdown. Do you see this growth story going forward, the Indian growth story 9% plus sustaining?

Lyons: I don't think rates will be 9% next year; growth would probably be nearly 8% next year. So we would be slower in pace of growth.

Q: Why do you say that if I can ask you? Why do you say growth would slacken a little?

Lyons: The Indian stock market looks vulnerable, we had such a big rise and that would play out in terms of confidence. After such strong growth in recent years and having already seen policy tightening taking place, but yet to feel, it's natural to expect slower pace in the growth over the year and 18-months ahead.

Q: Are you happy the current administration has completed about 2.5 years? Are you happy with the pace of reforms, if it's been slow, what do you expect the government to do in a medium-term?

Lyons: I can understand where the Indian policymakers are coming from, because they have so many different stakeholders and that's the challenge in a democracy and with the election not too far away, the reality is that for India's own goods India needs to embrace change in the financial sector. India needs to accept that foreign banks bring big value added, they accelerate the pace to change, they bring best practice, they add to competition with benefits, Indian consumers, Indian corporates. The fact that over the last year only 15 licences have been granted to 30 foreign banks, suggest that the pace of change is not as dynamic as it should be.

Q: In terms of your footprint in India. what's the kind of expansion plans do you have, I do understand that you have got big rural plans in India?

Gerard Lyons: Standard Chartered has done very well in India. Indeed Standard Chartered has done very well globally; our strategic intent is to be the best international bank and lead the way in Asia, Africa and the Middle East. Within that environment, India is one of our key markets.

We have expert staff here in India. We will continue to grow our branch base here in India of seen of about 82 branches ourselves. We also now have acquired American Express Bank, we are deepening our global capability, the Standard Chartered aim is organic growth and where possible we have acquired strategic acquisitions.

But the focus is very much on organic growth; our organic growth is doing very well in India. But as we tell, we would like to do more; we would like to have more licenses, we would like to bring financial services to a greater range of people, our housing or banking capability is very good and the interesting thing about housing and banking capability is that we are very much a network bank.

Q: You talked about the credit crisis, the subprime woes as they are called in India. How has that affected your bottomline because we do understand Citigroup was reeling under the crisis, how have you tackled the issue, if at all it arose in your case, if at all it affected your balance sheet; why do you think India was largely insulated by this crisis?

Gerard Lyons: The financial crisis has not really hit our markets and in that respect, has not really hit Standard Chartered. We did have a structured investment vehicle, but that was not as leveraged as others' structured investment vehicles.  That very well handled by us and it was invested in high-quality investments.

So Standard Chartered compared to other international banks - we have actually been well positioned in this crisis and we have experienced strong organic growth. We are looking forward to making stronger growth as we move into next year. It would be wrong, of course, to be complacent.

Q: Does this talk about capital convertible India to move towards full or capital convertibility? Given the kind of subprime crisis and huge dollar inflows especially from the PN route, Indian policymakers have been wary of this word - capital convertibility. What would your advice to Indian policymakers be on this front?

Gerard Lyons: Step back, put it in context and there is a case of saying capital count convertibility is necessary to actually help deepen and broaden India's capital markets.