With the Fed likely to delay its tightening post Brexit, the dollar would strengthen in an orderly manner, says Tanvee Gupta Jain, Economist, Macquarie Capital Research.
Tanvee Gupta Jain, Economist, Macquarie Capital Research is of the view that with the Indian macro environment looking good, it will be least impacted from the Brexit event amongst its peers.
Currently, there are three things playing out for India – macros are good, growth is recovering and consumption too is improving, although the recovery is not yet broadbased, says Gupta.
Moreover, she expects the Fed to delay its tightening, which would lead to an orderly strengthening of the dollar. So, at Macquarie their base case scenario for rupee depreciation is around 70 to the dollar. Her assumption is that most Central Banks will move in an orderly fashion.
She also expects the Brexit event to lead to a lowering of the global commodity prices, which in turn could help India since it is one of the biggest importers of global commodities.
However, she warns that India is not insulated in case global economies take a beating.
On the rate cut front, she expects a 25 basis cut in calendar year 2016.
Below is the transcript of Tanvee Gupta Jain’s interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Anuj: Do you get a sense that the Indian economy is resilient and it will not have too much of an impact from Brexit.
A: I would say there are two things. One is if Brexit leads to a slowdown in global growth environment, India will get impacted. But again, we all talk in terms of relative basis. So, I would say amongst its peers, India is among the least impacted largely because there are three things, which are working at play. One is India’s macro environment has started looking good, growth has started recovering, especially you can see the signs of consumption improving, public capital expenditure (capex) improving even though it is still not a broad based recovery, but at least the macro environment is much more stronger.
Second is external stability risks are much more contained at this point. Current account deficit is less than one percent of gross domestic product (GDP) what we are forecasting for this year. FDI flows are at an all time high. So, even if there is any kind of uncertainty because of capital flows point of view, India, the risks are very much manageable.
The third is that Brexit will lead to global commodity prices heading lower barring gold. And we know India is a net commodity importer, which will give much more bounty to the policy makers to use this time around to contain the macro stability risk.
So, India definitely benefits, but overall if it is impacting the global economy as such, India is not insulated.
Sonia: If you come down to specific sectors, there are sectors like IT that will get impacted. You have done a bit of calculations on that front. Can you tell us what the direct and indirect impact could be because of the pound decline?
A: I am an economist, so especially on the broad based sectors what we are seeing is that the sectors like pharmaceuticals, IT or auto, to some more getting impacted, but if you look in terms of financial linkages our view on the rupee is that it will head towards 70 per dollar towards the year-end, so we have not changed our rupee assumption significantly.
At the same time, we are saying the Fed is likely to delay tightening as of now. So, there will be an orderly strengthening of the US dollar. So, in that scenario, yes, any volatility in currency will have a negative impact on IT, but overall we are saying that in rupee we will not see significant depreciation bias. Heading towards 70 per dollar is what is our calculation.
Anuj: But what is the risk to that call because 70 per dollar is something that the market will easily deal with and actually be happy about. The risk is a currency shock. So, what is the risk to your call?
A: 70 per dollar is a base case scenario. If you look at risk around the 70 per dollar, the more the call is whether it is all the Central Banks going ahead and working towards an orderly movement in the currency market to reduce uncertainty or it is going to be a more knee-jerk reaction. The details are not clear yet. We still have to see how the negotiations are going around with the European Union (EU), what are the negotiations and what are the points of referendum and how it will impact GBP and the other currencies. And what is the response of Fed and Federal Open Market Committee (FOMC). So, I guess we should give it some more time, but our base case remains that all the central bankers would prefer an orderly movement which means that within emerging markets (EMs), India is among the least impacted. So, the orderly movement in rupee continues.
Sonia: What is your view on what the RBI will do henceforth? Governor Rajan will not oversee a second term, does that mean we get a slightly easier monetary policy and are you expecting any rate cuts any time soon?
A: Largely if the Brexit event actually leads to a slowdown in global economy, which means that central bankers or the governments across the word have to pump prime the economy be it via fiscal policy or a monetary policy. Our space for fiscal policy is quite limited because we are anyway running a deficit. On the monetary policy, our base case is seeing another 25 basis point cut for calendar year 2016.
However, one more rate cut, more than 25 basis points is also a function, who is the next RBI Governor gets appointed post Rajan’s term ends in September. So I would say one more 25 basis point rate cut, but again timing needs to be known as we get more clarity on the Brexit and the global economy impact.
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