FIIs flow to continue; see rupee at 49 in 1 year: HSBC

Foreign investors have pumped in more than Rs 9,000 crore (about USD 1.67 billion) in the Indian equity market so far this month.

In an interview to CNBC-TV18, Arjuna Mahendran, HSBC Private Bank says the liquidity flows will continue. "Given the sheer scale of the intervention, which the Fed is talking about, indefinitely pumping in tens of billions of dollars into the mortgage market into the United States, I think that is a very substantial policy effort from them. A lot of that liquidity is going to slush into other Asian markets," he adds. He says 50-52 would be an interesting range for the rupee. "At HSBC, we see 49 over a 12-month perspective, but it could get there quite fast. It depends at the speed in which the Fed hits the ground with this Mortgage-Backed Securities (MBS) purchasing scheme and how fast that money then moves into other types of risk assets. I suspect it could be quite fast," he elaborates. Also read: Year end rupee target remains at 54.5/USD, says Stanchart Bank Below is the edited transcript of his interview with CNBC-TV18's Sonia Shenoy and Latha Venkatesh. Q: We have seen extraordinary amount of FII flows in September, especially since September 8. Does that continue? A: Yes. I think the recent policy initiatives of the government have been every exciting from a foreign investor’s perspective. A lot of this is not new. It has been talked about and we have had earlier false starts. I think the foreign investor community is watching this very closely. But the fact that the government has come out with very bold initiatives and is prepared to actually put its coalition numbers or arithmetic on the line is quite interesting. From that perspective, investors are looking for an excuse to get more enthusiastic about India. The Indian market has done extremely well this year compared to lots of other emerging market, particularly the BRIC markets like China which have been huge underperformers. I think there is still a lot of positive sentiment on Indian corporate earnings outlook. Q: Would you look Nifty at 6,000? Sector-wise, what would you play in India? A: That’s a very interesting point. Midcaps were performing today. It’s not a flash in the pan. We have seen this pattern across lots of other markets, Singapore in particular, but even in markets like Indonesia etc, which are less liquid than India is. You will see this move lower down in terms of liquidity into the smaller cap stocks. To me, it is a very important signal that investors are now prepared to take that risk of going into slightly less liquid instruments in these markets because they feel that the prospect of some sort of a big meltdown or big policy risk etc has now been removed. I think that is the case. What is QE infinite? What is this ECB initiative to protect the bond rates? It’s all to do with potentially unleashing an unlimited quantity of new money into the markets. Should you have anything remotely like a Lehman failure appearing on the horizon, which will then make us all dash for the covers and get back into highly liquid stocks, I think that tail risk has now been substantially reduced in the global context. Therefore, investors are now prepared to take that high risk by going into the midcap stocks. From a sectoral perspective, I think we are seeing much more interest in consumer plays etc, which hitherto are not moving as much as the majors because they were not liquid. That liquidity trap, if you like that we were in for the last year or two, is gradually easing. _PAGEBREAK_ Q: We have seen the markets catch their breath past week, after a fairly heady rally with extraordinary activity from both the ECB and the Fed. Is it good to go for more? There were some brokerage reports that there has been an extraordinary amount of foreign inflows not seen since maybe 2009-10 in terms of the last couple of weeks’ flows. Does this continue? A: Yes, I think it will continue. I think it could continue for the longer than the market currently expects. People are looking at a rally lasting perhaps a month or even three months. To be honest, given the sheer scale of the intervention, which the Fed is talking about, indefinitely pumping in tens of billions of dollars into the mortgage market into the United States, I think that is a very substantial policy effort from them. A lot of that liquidity is going to slush into other Asian markets. It is going to be a headache for our regulators because when that money does come in significant magnitudes, it is going to create inflation again. It is going to stroke inflation. The inflation numbers in China last month rose once more. The Chinese are very worried about this because it will feed into wage inflation etc. So, the flow of liquidity will be a double-edged thing. But it has removed that tail risk in the financial markets. So, I think investors are just prepared to take more risk and therefore this will continue for longer. Q: Where would you pitch the rupee? Do you think before 2012 is out we see it consolidating around 52 or does it become even stronger? Does it go towards 50? A: I would say 50-52 would be an interesting range, from my perspective. At HSBC, we see 49 over a 12-month perspective, but it could get there quite fast. It depends at the speed in which the Fed actually hits the ground with this Mortgage-Backed Securities (MBS) purchasing scheme and how fast that money then moves into other types of risk assets. I suspect it could be quite fast. There is a bit of volatility ahead. That is to do with the fiscal cliff issue. That’s a huge issue for the United States and the world because it potentially means that up to 3 percent of US GDP growth could vanish next year, if we have a worst case situation. Best case you would still see at least 0.5-1 percent of that 2 percent growth, which we have been having this year, going away. Consumers basically will have less money to spend by paying higher taxes etc. That whole issue comes to a head just after the elections in the second week of November. That could be a period of volatility. That could affect our currencies including the Indian rupee and ofcourse the dollar and the Yen are the main beneficiaries of any risk aversion in such events. That’s something I would be cautious about.