India needs to work harder to draw FIIs: Arnab Das

Ekta: What is your sense in terms of what the future developments for Greece can be? We had some statements from government officials from Greece saying that there will not be a Greek exit. But do you think that there is a likely chance of that and what role is Germany going to play in this?

A: The chance of a ‘Grexit’ is rising by the day. Of course, that does not mean that it is a done deal that there will not be a deal to keep Greece going and keep it in the Euro zone.

Germany’s role, of course, is and will continue to be pivotal. Along with the other core countries, Germany will be in the lead among the creditors, probably even more important than the International Monetary Fund (IMF).

What is happening here is that this is a repeated bargaining game. Each round of this is going down the wire and as many people are saying, this week is crucial because there is a Euro Group meeting coming up and, indeed, every day and every week is crucial.

Really, I suspect what we are looking at as the next real flash point is the end of June when payments to the IMF are due. And then of course, it is possible that it will be delayed even beyond that because there is this idea that the Managing Director of the IMF has another 30 days or so to tell the board when a country has not paid.

So, already, Greece has sort of bundled its payments from the middle of June or early June to the end of June under president, by Zambia in 1980s. So, it is all going down the wire and this is what we should continue to expect to happen and indeed for each deadline to be somewhat delayed.

Of course, there will come a point of no return when Greece will either have to default and may have to exit or will have to come to the table with something that really works. This process is pointing to the chasm continuing to be quite wide.

So, I suspect that there is going to be a lot of movement on both sides. At least that is the signal from each side. There will have to be a lot of movement from both sides before there can be a compromise. And, of course, Germany and the other creditor countries cannot really afford to compromise too much because that opens the door to moral hazard to other countries that may be unwilling to reform or may be willing to go backwards in reform if extremist parties come to power.

And on the side of Greece, the government has been elected on the platform that will row back the reforms and not do all the fiscal, if you ask me. So, there is a big gap which will need to be closed if Greece is going to continue to stay in the Euro or at least avoid a default.

Nigel: The other big cue for this week itself is the Federal Open market Committee (FOMC) meeting that is due. When are you factoring a rate hike and what really are you looking out for in terms of this meeting?

A: There continues to be mixed signals in the data. The bottom line is that the data are improving in general although there is some back and forth in it. The labour market data are improving and there are some signs of wage growth.

So, to me it looks like September is still the time frame for the first rate hike. It also looks like as many people have been saying and as the consensus in the market pricing is moving towards that, there will be not a very strong process of raising rates.

The rate hikes will be very gradual and very limited in their scope. And indeed that is why the dollar, although it has not weakened dramatically, has not continued or resumed the strong up trend earlier this year and parts of 2014.

So, we are still looking at the US being the first country out of the gates. But, we are looking at a country which is going to be constrained in how fast it can raise rates by the somewhat tepid nature of recovery and also by the easing that is taking place in Japan and in Europe with the UK caught in the middle.

So, we are still in a relatively loose money environment even though the Fed will start to tighten in September.

Ekta: The other cue or what global investors are talking about is that Saudi Arabia has opened its markets to foreign investors. How important is this development for us? Break it down for us and what would it mean for an Indian market investor. Will he take out money from India to invest in Saudi Arabia? How would it work? Would there be reallocation of assets?

A: It is quite important. It shows that Saudi is trying to rejoin the world economy in a more complete way than mainly as an exporter of oil and an exporter of capital.

It also wants to import capital. It probably also reflects the fact that the policy of continuing to pump oil at relatively low prices and continuing to run the budget and run the economy as if the price of oil had not collapsed by half, does show a certain need for foreign funds to come into the country. That will encourage some reallocation of capital away from emerging market countries.

Saudi will be quite a deep, liquid and large market when this process gets underway and runs its course. So, there will be some reallocation in the short-term.

The reallocation that is really taking place, that has been a bit weight on the Indian market is maybe a shift out of Indian equities into Chinese equities because China is another country that is trying to reform and re-balance its economy and indeed it is doing so.

Although its MSCI inclusion has been delaye, if that does occur probably in a couple of years time, it will be a much larger weight than other countries. So there are other countries. Both Saudi and China and others as well with which India will continue to compete and perhaps that competition will become stronger.

So, India will need to deliver more to attract the same degree of capital flows as it has in the past and particularly on the reform front.

Ekta: What is you view on India right now because we have seen foreign institutional investors (FII) pull out from equities as well as debt markets especially in the month of May? Do you think that the FOMC uncertainty is possibly weighing on the Greek uncertainty and if in case we have a really good monsoon, you think that the interest would come back despite global uncertainty?

A: There are several factors going on. One is the global uncertainty as you say and that is of course affecting every country. But there is no massive global contagion unlike in the past when ‘Grexit’ was on the horizon because the Euro Zone has done quite a lot to insulate itself from the contagion. So the global spill overs, although they will occur, are not going to be systemic in nature. So, there is a global effect from that, there is a global effect, as you say, from the uncertainty about the Fed.

The main issues though are that India has underperformed on the reform front. It has underperformed relative to hope and expectations on the economy in terms of inflation falling, growth responding to the fall in inflation by the fall in commodity prices, the cut in interest rates and the degree of reform that has taken place so far.

So, even India, although it is a large domestic economy, is also affected in the slow down in the global economy and it needs to do more particularly if there were progress in the goods and services tax (GST), that would send a signal that tearing down of internal trade barriers within the Indian economy could regenerate a stronger domestic demand led growth process in India itself.

There could be a take off in both consumption and investment, but these things are not happening yet and that is the main reason why India is underperforming.