Mkt stability, growth pick-up key to INR-$ rate: StanChart

Saikat Das
moneycontrol.com

Both the government and RBI are now-a-days burning the midnight oil to stem the rupee's tumbling against the US dollar. It was recently evident in the government's repeated statements/actions to calm the nerves of the currency market. Similarly, RBI too came up with a slew of measures, the latest being the advanced release of an improved current account deficit data on June 27 before the market hours, breaking decade old tradition.

Two positive factors, according to Ananth Narayan, Co-Head of Wholesale Banking, South Asia, Standard Chartered Bank, can change the game.

"Two things have to happen. One, we need to have stability in the markets so that FIIs (foreign institutional investors) are incentivized to come back again. Secondly, India's growth story has to come back. India is always been a growth stock. People come here not looking for just 3-4 percent returns," he told moneycontrol.com in an exclusive interaction.

He also advocated for a case for sovereign bonds to attract more dollar as well as to facilitate overseas borrowings for private sector.

Also read: Expect rupee to continue trading in 58-61/$: Ananth Narayan

Here is an edited excerpt of the interview:

Q: Is it high time for the government to launch sovereign bonds to attract dollars? India had launched similar issues like it in 1991, 1998.

A: Having sovereign bonds at some stage absolutely makes sense and is good for the economy. This has nothing to do with dollar-rupee or anything. We need a trillion dollars over the next five years for the infrastructure sector.

This means, we need money from overseas. A lot of people have to go out and borrow money from overseas or raise money from overseas. So having a sovereign benchmark is always a great idea. It helps a lot of entities to price their borrowings appropriately. Therefore, it actually helps private entities to raise funds.

Now should it be done now? It is a tough question to answer. Right now, it is debatable.
In absence of this, you have to go to surrogates like Exim Bank or State Bank of India (SBI).

Q: Currently, India has a sovereign rating of BBB-. Do you think that the downward risk of slipping into junk category is somehow diminished?

A: Over the last eight-nine months, the fundamentals have definitely improved. So, inflation is down. Fiscal deficit has trended down. Indications suggest it will be kept at 4.8 percent this year as against 5.2 percent a year ago. One very big positive is the fact that oil prices were adjusted upwards. So, you have prices being revised every month.

The worrying sign is what has happened in the last one month. We can argue it is a global phenomenon. The dollar-rupee (exchange rate) coming at 60 is clearly a sign of worry.

The fear and the risk is that the markets itself change the fundamentals. So, normally you have fundamentals determining where the market is, but if dollar-rupee going beyond 60 then you could have a situation where the fundamentals itself worsen. You face difficulty in getting the capital inflows. Local corporates, which have dollar and foreign currency borrowings come under trouble in terms of repayment. Finally, it turns out to be a crisis of confidence.

Q: Did markets overreact to the Federal Reserve statement 10 days back?

A: If I look at the global markets, I was surprised by the size of the reaction, particularly in emerging markets (EMs).

Now at a fundamental level, this is both good and bad news. Bernanke hinted at reducing the size of quantitative easing (QE). It is good news for the US private sector, so that cannot be bad news for the globe as a whole. Yes, it is bad news for fixed income instruments, but not necessarily for the world as a whole.

Q: Rupee hit record low against the US dollar. Many say, RBI is not intervening on a big scale. Your comments…

A: My personal sense is they have intervened in the last one week in a stronger fashion. It is very difficult to say how much of the flows we are seeing in the market genuine flows are and how much is intervention.

For instance, two large anecdotal foreign direct investments (FDIs) were supposed to be coming through a particular period. So, you had the Unilever money and then Bharti Airtel money which came in sometime back from Qatar investments.

However, personal sense for which I have no data to corroborate is that in the last one week, the intervention size has increased.

Also read:Indian rupee turns senior citizen; PSUs add to woes

Q. What is the way forward for the rupee?

A. There are various possibilities so let us look at each of the possibilities.

You could have things stabilising and fundamentally what do we need. We have a current account deficit of about USD 8 billion every month which means every month you need USD 8 billion to come in, in the form of capital flows to just maintain parity. The good thing is, current account deficit (CAD) genuinely will come off going forward.

Reasons: After May, gold imports have come down. Two, the moment dollar-rupee goes up at some stage you will have the current account deficit coming down. Three, imports will become pricier, exports will become more competitive.

Q. Will CAD improve with sharper rupee fall against the USD?

A. CAD will not change overnight. So, if rupee goes to 65 tomorrow, it doesn't mean current account deficit reduces by USD 2 billion. It takes a lot of time because if you have too sharper depreciation, I have heard several exporters telling me that they immediately get calls from their buyers asking for reduction saying in 10 percent movement in one month. So, reduce your bill by 10 percent.

Q. What are the key factors to play a role in exchange rate?

Two things have to happen. One, we need to have stability in the markets so that FIIs are incentivized to come back again. At the moment they are very nervous because of this volatility.

What are the total investments which have happened? USD 200 billion dollars plus of FII investments have come through in debt and equity. We have had USD 280 billion of FDI investments which have come through in the last 10 years or so. All those people have seen 30 percent depreciation of the rupee in the last two years. They have seen 10 percent depreciation in the last one month and now to expect them to bring in more money at this stage is difficult.

Secondly, India's growth story has to come back. India is always been a growth stock. People come here not looking for just 3-4 percent returns. So, we need to have investor faith that this can go back to 7-8 percent which can only happen if those infrastructure investments which are stuck right now can get cleared. The CCI, we are all hoping that it delivers.

Q: What is your take on non-food credit growth for 2013-14?

A. I think it will probably remain in the same region where we are right now, 14-15 percent. A lot depends on the monsoon. We are hoping monsoon will be a lot better this time around, which is again another micro positive. That should hopefully give a fillip to the rural purchasing power which can in turn give a fillip to the industry as a whole.

However at the moment it looks, the credit offtake will remain muted in comparison to last year.

Q: Last quarter RBI has paused. So when do you expect the next cut?

A: Given the volatility in foreign exchange markets, an immediate rate cut sounds difficult. No emerging market country including us can afford to have rate cuts at a time when forex is extremely weak.

So, for rate cuts to recommence we would need some stability to come back in the forex markets. A weakening rupee impacts inflation expectation, inflation will be a threat.

Secondly, we are a large CAD country, we also need capital flows to come in to the country. Now capital flows need interest rate differentials. If you narrow the interest rate differentials too much it will be difficult to bring in that money.

Q: Banks keep harping on CRR cuts to pass on the rate cut benefits. Do you endorse?
 
A: The reason why rates struggle to come down is that there is a consistent and persistence liquidity shortage in the system. It varies between Rs 50,000 crore to 100,000 crore (per day as per RBI window). It will rise going forward on account of advance tax payments.

About 15 percent of the total banking assets is infrastructure. All of us agree that the country needs infrastructure investments. Where we need to find a solution is how we make sure that liquidity is available for this productive sector which is infrastructure. There is a common ground for it.

I don't see a problem with base rates being too high at a time when CPI is still 9.4 percent. So keeping base rates high is not insensible. What I would like to see is rates being low for the relevant infrastructure sectors like power, roads, ports so on.

I would like to see a situation where we have a dual system of rates, one for the right sectors and the regulators and authorities can decide what are the right sectors so if they want to exclude real estate that is fine. So you decide which are the right infrastructure sectors whether it is education, roads, power and ports.  We should make sure that the rates are low there on those right sectors. That is where we have struggled so far.
 
Q: What is the sense you are getting  from your own borrowers?

A: It is still very muted, barring a few handful of corporates. Large corporates, for instance Reliance Industries announced in their AGM that they have a large investment plans in India. Barring those kind of exceptions, we have not really seen too many companies come up and say they want to invest in fresh projects in India.
 
In fact a lot of the interest that we have seen is for overseas assets or for overseas investments or for overseas acquisitions.

saikat.das@network18online.com