Jahangir Aziz, chief economist, JPMorgan in an interview to CNBC-TV18 spoke extensively on reasons for nervousness across equity markets due to fall in crude prices and volatility seen in most currencies. Globally, most of Asian markets were weak barring Shanghai. The markets seemed to be weighed down by the persisting slump in oil prices and weak US close. The rupee too has plunged to a 13-month low on broad dollar strength.According to Aziz low crude prices would be a massive positive for Indian current account deficit, even if it were to trade at USD 80/barrel.
Answering a query if India doing enough in terms of the government getting its act together with regards to reforms etc - he thinks the crucial variable to watch out for a turnaround would be corporate investments, which has not yet picked up and is still languishing.
Talking about the depreciating rupee, he says the house was expecting it to trade at around 65 to the dollar in 2015 but it seems to have happened earlier than expected.The impact of Russian sell off on global economy and global equity inflows is a bit exaggerated and only a knee-jerk reaction could be expected but it would definitely impact fiscal stability for the country per se, says Aziz.
Below is the transcript of Jahangir Aziz’s interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.Menaka: What do you make of this confluence of lower crude oil prices, there is no stemming that fall, currency volatility, thanks to that and therefore nervousness across equity markets?A: Much of the sort of anxiety that we are showing up in the market obviously has to do with the fact that this is December and as we are coming to the end of our usual accounting year but beyond that the real sort of economic driver has been the fact that the market and analysts are still split on what is the driver for the decline on oil prices - is this simply very large supplies coming into the world or is this a harbinger of really bad demand conditions, continuing through 2015 and depending on which side of this debate you are on and most likely looking at the price actions of the last week to ten days most people seems to be thinking that most of the decline in oil prices is probably due to demand compression.
You will clearly be very anxious that the things aren’t going really well for growth in 2015.Menaka: What is this going to mean for India? Let me start with the impact on the currency. We have seen the rupee now depreciate to Rs 63/USD levels?A: There are couple on things on rupee depreciation but before we get into rupee depreciation one of the more obvious impact of oil trading not just at USD 60/barrel but even at USD 80/barrel is that that is a massive positive for current account in India.So we are going to get a pretty large benefit coming out of a stronger current account. So whatever current account you had in your mind you will have to cut it back. So that is a positive.In terms of the weakness in the rupee the weakness in the rupee were as the correspondents were talking about was for several reasons. On economic fundamentals if you look at what are the drivers of rupee not from a day to day but from a quarter or an year-on-year (Y-o-Y) basis is that how is growth differential with trading partners panning out and what is happening to inflation differential.Higher growth differential means that we will be facing appreciating pressure, higher inflation differential means that we will be facing depreciating pressure. Now if you look at what is happened to India versus what has happened to it’s trading partners growth differentials has actually come down, which means that even though growth is around 5.5 percent for us, growth in the US has actually picked up. So the differential has narrowed. At the same time even inflation has come down, the inflation differential still remains very wide. So, if you look at the two of them together we had been talking about this.So, rupee depreciating against the dollar isn’t something that is surprising. So, that is the first thing on economic fundamentals and second I would say that if you look at what Reserve Bank of India has been talking about at least for the last three months that everybody keeps obsessing with INR-USD rate but no one really looks at what is happening on a trade weighted basis that India has been appreciating significantly against Euro and Yen and even though the weight of Euro and Yen on a trade weighted basis is not very large the significant appreciation against the Euro and the Yen needs to be offset by depreciation against the dollar just to keep India competitive.So, from a competitive point of view RBI has been talking about this for quite some time but you don’t obsess with the INR-USD rate and look at it from a trade weighted basis and on a trade weighted basis you are still appreciating.Menaka: How comfortable are you with the rupee going to Rs 65/USD?A: We had rupee somewhere around that level but not before end of December clearly. So, we don’t expect it to go to December. So we had INR-USD at around those levels probably in the second half of 2015. So probably it is happening earlier than we thought but those were the levels that we were targeting.Menaka: And we haven’t even seen the Fed unwind as yet in fact in terms of moving rates up.A: When the Fed unwinds and we can talk about that but when most emerging market economies including India will not stand against anything, most Asian emerging market economies particularly who have seen this appreciation on a trade weighted basis happening are probably going to accommodate the Fed rate hike i.e. they will allow their currencies to depreciate against the dollar rather than December.Menaka: So what would your revised mid 2015 expectation for the rupee be given that we have already hit or we are close to Rs 65/USD looks within sight at this point in time already?A: I would say that we need to sort of differentiate between what is happening on a very short term basis given the pretty serious contagious fears at this point in time in emerging market countries if you look at every emerging market currencies against the US dollar they have all moved in different directions. INR and Korean Won were the last sort of people holding up. But even the INR has given up today. So, everybody has fallen to that.So, there is a generalised dollar strength problem and there is a generalised fear coming out of the plummeting in the oil prices but we need to look beyond that and I would say again on a fundamental basis US dollar, INR if are bilateral forecasts for US dollar, Euro over Yen hold, and it is a big if, then about 65 levels were the ones we were looking for, for 2016.Senthil: All of this coming about when there is rumbling now getting louder that India is not doing enough. So, how much of a concern is that?A: Not doing enough in what sense?Senthil: On reforms, on the government getting its act together?A: Really the crucial variable which we have been waiting, how long, three – four years now to turn around is corporate investment.Senthil: And that hasn’t happened.A: Corporate investment has been languishing and I would say that if you go back probably when this started in, the second quarter of 2008 as long back as that and that really is the variable that everybody is looking to see how it turns out. That is the variable everyone should be looking at to see where India goes and clearly there are binding constraints to investments that existed in 2013, the same binding constraints existed in the first half of 2014 and unfortunately the same binding constraints exist in December 2015. Those binding constraints haven’t been removed and till they are removed I don’t think the needle moves very much in corporate investment.Menaka: Given the volatility we have seen in the currency in Russia how worried should we be about the impact of what is going on in Russia on the global economy, global equity flows?A: The impact on global economy or global equity flows probably are exaggerated, there will be some knee jerk reactions. The bigger concern is that what exactly does it mean for the economic stability and the fiscal stability more importantly of Russia per se. There is a price level of oil, below which if oil goes then Russia’s public finances run into serious sustainability questions.We are probably around that and which is why you are seeing these exaggerated moves in the Rouble and you saw the 650 basis points reaction from the central bank. But it is still very much a Russia problem, I don’t think there are economic per se contingent emanating just because Russian Rouble has collapsed. It is a broad general fear that the oil price decline is probably telling us that global growth is far weaker than we expect than simply that there is no supply which should have been a positive.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
