India reasonably better placed among world markets: Citi

He does not see the US Federal Reserve raising interest rates until at least December as it is extremely cautious and concerned about external impact and will prefer to wait for the Brexit story to unfold in an orderly manner.Below is the verbatim transcript of Willem H Buiter's interview to Sonia Shenoy & Anuj Singhal on CNBC-TV18.Anuj: What is your reading of the current situation? The global markets have ignored Brexit, the US market has been extremely strong and the data out of US market has been strong as well?A: The world economy is a mixed story. There appears to be some life left in the US recovery as confirmed by the recent payroll data; thanks to both credit and fiscal stimuli, some floor put under the declining growth in China but of course Brexit has happened or least the Brexit vote has happened, which from a long run perspective will create a significant drag, not just on economic activity in the UK but also the uncertainty it creates concerning the risk of Brexit spreading to divide European family and the weakening demand in Europe. So it is very much a tale of two cities; reasonably strong in the US, I think deceptively robust in China. I do not believe the Chinese stabilisation of growth is sustainable because this is driven by unsustainable credit expansion and adding to excess capacity is a major source of concern but for the time being that looks robust and market being short-sighted have concluded the fact that the Brexit vote has not caused the sun to stop shinning and from the fact that the US and Chinese data seem to be less bad than expected because everything is alright. So there is an element of mistake in euphoria in many asset markets at the moment.Sonia: From your vantage point now, what is the sense you are getting on when the Fed would move on rates? In the past you have said that you do not expect a rate hike at least up until September. Given the recent incidence, what is your sense?A: I think the Fed is on hold until December at least. It is conceivable that if we get robust payroll data, they could go in September, but it is extremely unlikely. The Fed is very concerned about the potential impact of adverse external developments through financial conditions and financial stress in the US on US economic activity and they will want to see the Brexit story unfolding in an orderly manner, they want to see the banking sector weakness in the euro zone especially the Italian banking crisis addressed properly before they will risk raising rates and sending another surge of global yield reaching capital into the dollar and further undermine the competitive position of US industry. So they will be extremely cautious and so December, at the earliest, I would say.Anuj: How high is the chance that that leads to the goldilocks scenario for equity markets and leads to an exuberance or irrational phase in the market?A: I think we are already having that. I do not think the current equity valuations worldwide are justified by the likely future growth of earnings. Clearly low yield, low risk free rates and as I said declining risk free rate to a while should boost equity valuations, but the same forces that drive down the global risk free interest rate, the discount of future corporate earnings are also depressing future earnings growth. So I do think that markets are looking at the denominator of equity valuations to discount rates but not recognising that the numerator expected future earnings are also likely to come in weaker than they were expected to six months or so ago. So I do think there is an irrational exuberance in asset markets especially equity markets.Sonia: What is your reading of the Indian economy now?A: The Indian economy is one of the bright points of light in an otherwise quite naughty world. Growth has been maintained, inflation is under control and assuming that the succession of Rajan at the RBI, it takes place in a way that does not spook markets, India should continue to prosper. It is less dependent of course, on the forces globally that are causing downward drafts, commodity prices which are still with us are on balance. It benefitted Indian economy and on the whole, India, without fully exploiting its enormous potential because of lack of structural reform, is still one of the points of light. In fact, among Brazil, Russia, India, China and South Africa (BRICS) I would say it is the only one that is somewhat better than I expected at the beginning of the year.Anuj: The other piece is what is happening in Japan. There is growing concern that the Abenomics, the fruits of that are withering now. What do you see coming out of Japan and do you think that is going to be an important cue for world markets as well?A: Japan itself is about 6-7 percent of global gross domestic product (GDP). It is important, but not vital. Abenomics, at least it is third arrow, the supply side reforms has been a massive disappointment that is unlikely to change. Yet, the electoral victories of the Abe Administration are in my view unlikely be translated into a better designed combined monetary fiscal stimulus which could help achieve the inflation target and boost output in the short run nor is it likely to encourage the administration to pursue labour market reforms, service sector reforms, even potentially immigration reforms that will be necessary to boost growth in a sustainable way. So, Japan will continue to disappoint. You may get a small fiscal stimulus as a result of the greater parliamentary control of Mr Abe’s coalition, but it is not going to be a sort of global strength. It is not a disaster, but also no sort of upward surprises.