On budget day, Harsha Subramaniam of Bloomberg-UTV held a panel discussion in London with Robert Parker, senior adviser, Credit Suisse; Arnab Das, managing director (market research and strategy) , Roubini Global Economics; and Bhanu Baweja, global head (emerging markets strategy) UBS. Edited excerpts:
Robert Parker,senior adviser, Credit Suisse
ON FOOD INFLATION: Food inflation is a global problem, look at Indian food prices, they have risen on the exact same rate as the Chinese food prices. We are assuming that food prices start to ease during the second half of this year. In terms of threat to growth over the next one-two years, which is at 9%, that’s our house forecast for this year, which is actually very low... growth is being fuelled by strong consumption growth and investment spending.
ON FOREIGN INSTITUTIONAL INVESTORS (FIIs) : There was evidence as we ended the year that capital inflows was slowing down. So far this year, we’ve actually seen, and again it’s a global phenomenon, that money has been leaving in the last three weeks, the global emerging markets. As investors, to some extent, have derisked their portfolios. In terms of capital flows going into India, over the past year monetary policy is still being tightened, which is a constraint for further capital inflows. Monetary policy starts to stabilize, when monetary tightening cycle ends at around June-July. In the second half you could see money coming back into the market attracted by a very strong growth story.
Arnab Das,MD, market research and strategy, Roubini Global Economics
ON MACROECONOMIC CONCERNS: I still think, there is a risk of overheating. The high inflation rates of India and emerging economies have basically been demand led. There is an important risk of adverse oil supply or rather an oil shock taking place. So, that I think is the biggest risk. That explains a lot of the pull-back we see in India and the emerging markets. So that’s what the markets will be focusing on...what they (countries) can do is reduce subsidiaries, reduce the supply side, free up resources for investments to raise the potential growth rate. We are moving in that direction, but not fast enough.
Bhanu Baweja, global head, emerging markets strategy, UBS
ON FIIs: The biggest problem in the global economy is leverage of the developed world...we have moved from private sector leverage to public sector leverage. So we had an “I” issue in the US, from there we went to the “C” issue, which is from investment to consumption, perhaps in the next two-three years we’re going to have a “G” issue, which is government spending. In this sort of a world, we’re not going to get any topline growth in the developed world. India does not have any buffer for mistakes, whether it’s accidental because of policy or drought in India. The aggregate demand curve in India is expanding but the aggregate supply curve in India has remained prefect. Which basically means for small increases in aggregate demand, you do see big increases in prices, which means that you have a self regulating mechanism, through which high growth leads to very high inflation. And what will the RBI do about grain productivity being low....as 25 basis points hike does absolutely nothing about it.
ON BORROWING PROGRAMME:
The borrowing programme, if anything is 10% lower than what the street was expecting, a Rs 3.4 trillion. Do expect bonds to do well on it, we have already seen tenure bonds come in at 5-7% basis points. But the big picture here is that the supply side remains a constraint and that’s why the inflation risks are not coming off.... You are going to see low inflation but sequentially inflation is going to go higher. Some of the assumptions are also questionable, you are not bringing down expenditures in a big way, and you are also saying your fiscal deficit is going to be 6.4%. That begs the question what your growth assumption, which is 9%, I believe that is high, especially given the fact that inflationary risks is still reasonably high and Reserve Bank of India (RBI) has the onus of controlling this inflation, it is possible to see 100 basis points more from RBI... and I think growth is going to be closer to 8%, So, I challenge these assumptions on which the budget is based on.
What are they saying...
Meera Sanyal, executive vice-president and country executive , RBS
“Good intention, would like to see execution... Direct cash transfer is a positive move and sops for green energy very positive.”
Naina lal Kidwai, general manager and country head, HSBC
On FIIs & MFs: “We’ll see fresh investors coming in through mutual funds, which is positive. Anything that broadbases the investors we have in our stock markets is positive.. because it removes volatility when any one sector moves in or out.”
Madhu Kela,chief investment strategist, Reliance Capital
“Due to nervousness in the markets, companies are performing well and have delivered good numbers. But still suppressed in terms of prices and discounting. Buy selectively on these companies where performance is visible...”
Uday Kotak, executive vice-chairman and MD - Kotak Mahindra Bank
“ Banking could be anywhere between 3-4 parts. Divide banking into wholesale and retail. The tougher part is retail. For any bank to make a meaningful difference, both on asset and liability side, It is the 8-10 year period...”
Pawan Goenka, president, Siam Auto sector:
“No negative impact of the budget on the auto industry”
Budget: “Setting a deadline for GST and DTC is good news for the industry. Increasing allocation to infra and social programmes positive”
Punita Kumar-Sinha, senior managing director, The Blackstone Group
On valuations: “After the recent correction, market valuation is fairly reasonable..Historically, market was trading at 9-27 times..Today markets are trading at 14-15times... which is a decent valuation for Indian markets discounted premium of india versus others has narrowed...”