See re weakening against $; secular upswing underway: Economist

It is a foggy outlook for the India’s growth and inflation right now, he said.

Even independent of the commodity prices, he sees the rupee weakening against the dollar.

As regards sectors, he said that real estate is in a standstill. There are a lot of people who are circling around dealers asking for a better deal and there will be a downward revision in prices, he said.Below is the verbatim transcript of Taimur Baig's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Anuj: What did you make of the Fed's statement and the fact that we had so much volatility in the asset market but the dollar has been strengthening?A: Even if you put the whole Trump narrative aside, I think November-December was the time when we would have seen some strength in oil markets in any case, the Organization of the Petroleum Exporting Countries (OPEC) related device have nothing to do with Trump, the fact that inventories are drawing down in industrial economies around the world is not a Trump related development. So with or without that complicating factor, we have had a bit of a secular upswing in global activities led by commodities but also supported by industrials.So in this context the Trump narrative adds some fuel to the fire and the Fed had to react. So there are three rate hike narrative that we now are beginning to absorb and now the dots by the Fed governors and the market expectations are more or less aligned. These are rare phenomenon. In the last few years, the market has been far more dovish than the Fed and it pulled the Fed down to their levels. So we are seeing the truce between the markets and the Fed, Trump may have done that.Latha: That is interesting that you say that industrial economies are now almost at a point where the excess capacity has gone. What does this mean for asset allocation? Are you going to see emerging market suffer as much because of the dollar strength or will it not be so much?So as somebody who lives and dies with EM, I would like to think that there is some silver lining for the EM in this strong dollar, strong rates narrative.Typically, if you look at the last 30 years every time we have seen a secular rise in US interest rates or strong dollar cycle, it has been very difficult for emerging market equities and debt. We have an EM that is heavily indebted. We have an EM that is still hugely reliant on DM demand. Now hopefully the demand pull would outweigh the rest of the negative dynamic but therein lies the Trump complication. Is it going to be a zero sum recovery in the west where the US grows at the expense of us then we don’t benefit from this.Sonia: I am more interested in your thoughts on demonetisation. We have seen now the situation exacerbating a bit, lesser amount of ATMs are recalibrated, we are seeing a lot of corruption with the bank officials. Do you get a sense that the impact on gross domestic product (GDP) and consumption trends could be far worse than what was earlier anticipated?A: We still too little data because all the November data point that we are going to get will be tainted by the fact that there was an early Diwali this year. So we need to basically look at data, October and November on a year-on-year basis for example, auto, the November poor auto sales data when you look at it in combination with October numbers don’t look that bad. So I think we need to see December data but then in January or February we have to come back and look what happens to the disruptive economy.But I was with the consensus initially, which was that it will be a short-term disruption followed by a bit of a v-shaped recovery in the beginning of next year or towards Q2 of calendar next year. I am beginning to wonder whether I was too shallow in my analysis if you will that there are some deeper dynamics at play that companies that have always operate on the margin are not part of the formal economy and not paying taxes. Will they simply die as a result of demonetisation and would that create minimum Trump headwinds to the economy. We haven’t talked about that issue. Right now we are only talking about the cash related disruption, how to bring in more cash but there is more fundamental underlying theme here, which is what happens when the economy is forced to become more formal.Sonia: Not only those companies but what about the rural pocket that has faced the bigger brunt or the largest brunt of the whole issue?A: I am particularly looking at agriculture processing. So I was looking at a company that supplies edible oil to road sector in India and they had to suspend their production for a while because of the confusion around demonetisation, they are back online so that is an interesting test that there was severe disruption there in the second-third week of the November but by early December they are back on line, they are supplying. So maybe if the rural demand which is usually about necessities, agriculture cycle related, disrupted only temporarily but we need to then start thinking about the medium-term implications, not just a short-term issue.Anuj: Last year the Indian macros were looking quite benign. Now with crude prices also showing signs of surge, does that change things for India for 2017 and 2018?A: I wouldn’t worry about it. In fact the lower commodity prices have hurt India in multiple dimensions which will go away. India is a very large oil refining sector, it is a mining sector and these have been under deep recession the last three years. So we will see some offset there as commodity prices recover. Nobody is predicting a major bubble in the commodity markets, so if oil goes to USD 55-60 per barrel, it might be bit of a goldilocks. Some of the distressed part of the economy recovers but inflation implications are not that dire so I wouldn’t worry too much about 2017 with respect to commodities.Latha: How does the growth inflation dynamic play out? First of all, how much have you reduced your growth numbers for this year and the next even if it is only directional, how much is it and how much elbow room does Reserve Bank have in the light of what you are saying about commodity prices and the Fed's hiking?A: It is rather foggy outlook right now for growth and for inflation because if you do believe that some of the pass-through from commodities will take place on the fuel and diesel part of the consumer price index (CPI), maybe the disinflation is as good as we have seen so far unless of course the demonetisation, disinflation starts showing up in rand and other areas but again too little data right now to make a strong call. So we are with the consensus about 50-75 bps downside to FY16-FY17 growth and therefore 2017-2018 some of a recovery to the low 7s. I still am confused about what the GDP number means overall but bottomline is that activity has suffered. It should pick up but we need to start thinking about the medium-term implications such as short-term issue.Latha: Yesterday's trade deficit data indicated that the deficit has gone back to 13 billion per month. Would you worry now, crude prices have not yet risen, they may rise next quarter, are we going to see the rupee beginning to resist the pressure?A: Even independent of the commodity issue, I am a rupee bear. I look at 72.50 per dollar by the end of next year, 75 per dollar by 2018 because I think that India has been a bit of a laggard in that whole EM capitulation to DM rally. There is no upside for India in remaining an outlier in this area. So, the RBI should let the rupee go if that weakens and therefore regardless of what happens to commodity prices, I think the rupee can weaken steadily from here onwards.Sonia: I just wanted one follow-up to the point you were making about rural India, what are your thoughts on urban and corporate India? Has the cash crunch issue been resolved a bit or is there some more pain to go maybe for a couple of quarters?A: Areas like real estate is at a standstill right now. We haven’t seen prices fall but clearly there are a lot of people who care circling around the developers saying can you give us a better deal, given that demonetisation mean there should be disinflation so we are seeing a bit of a stand-off between developers versus potential buyers. There is only one possible outcome, there will be a downward revision to prices but we haven’t seen that yet but that is more of a 2017 story in my view than right now what is going on.Beyond that, I think it might be more of a temporary disruption story like auto sales, we are willing to see December numbers before making a very big story out of that but my other concern is that industries that are export oriented. You were earlier referring my segment about pharma companies having a lot of trouble in the US because of legal issues as the US turns more protectionist and more inward, would Indian, IT, pharma and even manufacturing companies feel more headwind. That is the big challenge going forward.Anuj: What about the money market, the bond market? We have seen a lot of volatility off late specially in the US market, what are your thoughts on that?A: The US story is interesting. We were not particularly bearish on fixed income even a few weeks ago, we thought that once the 10-year hits to about 250, we are done but the way inflation expectations are picked up in the US, even without any materialisation of  inflation shock means that we can fight that trend right now. Fed is on a hiking mode, everybody thinks fiscal expansion is coming. So we are very much in the pay rate story in the US and also the whole repatriation of US dollar story could also add some complications to the bond story going forward.Although in the corporate debt market in the US, you could have a bifurcation whether there is treasury sell off but corporate debt remains attractive simply because of the bullish story in the commodity sector and tax cut expectations.Latha: The Indian 10-year?A: Yes, that has been quite the story in the last few months. So all my foreign clients who have been leaving India have missed out on this amazing rally and you do see one of those situations where domestics have been investing and the foreigners have been leaving, so global, local bifurcation very stark in India.The demonetisation and their cash infusion must have some sort of impact on bond market dynamics and we are seeing that but now with the MSS coming in, what it means for the fiscal and fiscal will now have to have 0.1-0.2 percent of GDP worth of interest cost if over the next 12 months, half of the cash come in the banking system and the banks that liquidity has to be morphed up, there is a fiscal cost to that but at the same time, the next issuance of the government would be cheaper. So we have a countervailing dynamic here.Latha: Does the 10-year go below or has it seen its best already?A: I cannot say how it can go any better even if we believe that the RBI has some legal room left and will be cutting in the February and April meetings, the market has gone ahead of the RBI. We have seen this in many emerging market economies where the domestic liquidity situation makes the policy rate almost irrelevant. We are on the verge of seeing that in India right now.