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Last Updated : Feb 12, 2015 04:43 PM IST | Source: CNBC-TV18

Tailwinds boosting India; need strong Budget: Macquarie

Dismissing the recent market correction as a “bit of a reality check”, Richard Gibbs of Macquarie said the India economy had several positives going for it and added that foreign investors were now looking for strong leadership in the Union Budget that takes later this month.

Dismissing the recent market correction as a “bit of a reality check”, Richard Gibbs of Macquarie said the India economy had several positives going for it and added that foreign investors were now looking for strong leadership in the Union Budget that takes later this month.

In an interview with CNBC-TV18’s Sumaira Abidi, Gibbs said he was not worried by the recent defeat of the BJP and said the central government still had a lot of political capital left with which to push its reforms agenda.

Gibbs also discussed the ongoing debt situation in Greece.


Below is the transcript of the interview on CNBC-TV18.

Sumaira: Can you take us through what are your expectations from the Greek debt negotiations?

A: It does look as if there will be bridging finance or an extension of the terms and conditions offered in relation to the resolution of the current impasse on the Greek debt side. I don’t think we need to fear a default or a significant haircut for creditors.

The Greek finance minister has been very keen to be working the hustings, if you like, reassuring investors that Greece is not going to make it an uproar In terms of public debt.

Latha: So according to you what now is the likelihood of Greece exiting Eurozone, also would you think there are still some contagion fears or all these unfounded?

A: It is a fairly low risk actually and that is fairly-high stakes for Greek to exit the Eurozone. The finance minister and prime minister both see the virtues of Greece remaining in the Eurozone and really it is basically the anti-austerity movement has been really pitted against that mountain of debt that they have.

Not so much monetary union per se, so the Greek people overall see a lot of benefits from being within the union and the Syriza-led coalition government is also likely to pursue that line. So, those kinds of concerns have been a little overblown by people wanting to break apart the Eurozone overall.

Sumaira: The euro is currently at 1.13 level. Do you think we could see it drift lower based on say, factors such as Greece as well as the recent quantitative easing (QE) by the European Central Bank (ECB)?

A: Certainly, we could see the euro drift lower or trade lower really because we haven’t seen obviously the full effects of full-fledged QE from the ECB. Remember that is most likely going to place the greatest downward pressure on the euro particularly against the US dollar as we move forward.

We are still waiting to see that unfolding. The extent to which there has been reaction in relation to the Greek debt issue that has mainly been contained within Greece’s domestic financial market.

So really when we are talking about further downside for the Euro on valuation that really does smack of QE coming through in -- that liquidity -- and that really the printing of euro basically the export of them and the purchase of other foreign currencies.

So, yes, we do suspect there potentially is another 5 percent down leg in the euro-US dollar rate but we are concerned if that is matched by an overall appreciation in the US dollar of five percent we may start to get pushed back in relation to this ultra easy monetary policy.


Latha: Indian markets have been seeing the foreign investors pulling out money albeit in small doses but continuously for the past 9-10 days, what is concerning investors?

A: It has been the tailwinds supporting the Indian economy and the Indian market generally have been so rapid and have turned positive so rapidly that people are concerned about the sustainability of that and of course we have also had an earlier than expected interest rate cut from the Reserve Bank of India (RBI) we expect another full 1 percent of cuts up to the end of fiscal year ’16 by the RBI and there are people saying is this getting ahead of itself.

So is the market pricing a risk becoming a little misplaced as well because there are just so many positives now coming through for the Indian economy and the Indian market and in a global environment which is far from happy and content at this point in time. There is a bit of reality check going on. I am not sure there is anything structurally amiss. It really is this issue about whether this period, this sustained period of ultra easy monetary policy and ultra low interest rates is giving rise to distortions in asset markets and whether the Indian market maybe prone to those distortions.

Sumaira: How closely were you and foreign investors themselves looking at the outcome of the Delhi elections and how have you read it?

A: Basically the national government is basically providing the benchmark for what the investors are looking for and how they are reading elections now across India and really what they are looking for is they are looking for strong reformers mandate for these particularly large population regions where elections are taking place because they are already seeing the proof in the pudding in terms of the Modi government and the fact that we have had some early progress on the structure of former agenda and that is improving the business environment.

That is improving the ease which to do business in India. Obviously it is improving margins and it is significantly making inroads into those supply side price and cost pressures which have been a big burden for Indian business.

Latha: How keenly are investors like you watching the Indian budget and how important will that be for further foreign institutional investor (FII) flows?

A: From a structural perspective foreign investors would like to see the government mapping out a medium term fiscal strategy that really does attempt to address in a measured but in a balanced way between deficits but in particular obviously the Budget deficit and how it is going to basically balance the need for more capital spending in the capital Budget against the current side along with the natural developments and transitions which are occurring in the Indian economy.

To put it crudely what foreign investors are looking for is the same strong leadership mandate that was shown in the election campaign by the Modi government and they are looking to see that coming through in relation to fiscal planning and fiscal management. There is one thing most major economies lack at the present time and that is a medium term fiscal strategy, so if that comes to the fore in the upcoming Budget then that will be given a very big tick of approval by foreign investors.

Sumaira: Is there a fear that the budget could end up being populist after the loss in the Delhi elections for the BJP?

A: There is that fear, it is a peripheral fear or concern. At the end of the day the national government has enormous amount of political capital. It has a much stronger mandate than any of us. Even those who are favourably disposed to the Modi government coming to power, even stronger than we expected it would be.

So there is room to move and we are in a world now where the other thing voters are telling us from a populist perspective if you like is that they want clear decisive decision making and leadership and leadership and they want to see what politicians are going to do for the future development of their economies.

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First Published on Feb 12, 2015 01:16 pm
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