Mumbai: Capital flows will resume once conditions return to normal later this year, and India is a more attractive investment destination than most given its growth outlook, said a a senior official at a foreign bank.
Hemant Mishr, managing director and head of global markets for South Asia at Standard Chartered Bank said there was a dearth of attractive investible assets globally, and with China’s growth expected to slow, India will see increased inflows once the turmoil on the global front is past.
“When the world moves to a situation of normality -- normality is not what we were pre-crisis but when things like Greece are in the backdrop ... I expect flows into India to pick up,” he said.
Mishr noted that historically a sustained period of low interest rates in the G-3 has meant significant flows into emerging markets.
He said over the next few months markets will continue to be cautious as they realize that minor shocks will continue to surface globally and could hurt risk appetite and lead to short-term fluctuations in the market.
However, he said chances that a crisis like the collapse of Lehman Brothers would recur was low and as long as problems were localized and well-managed by local regulators, they were unlikely to have global ramifications.
“More than anything else it’s the uncertainty that is hurting markets. In the event of any minor shocks, if they get addressed promptly, even if its restructuring of the debt, it is fine,” Mishr said.
“The pain is sharp, the pain is finite but the pain is short as well. In a way it is good, as the tumour is out of the system.”
Mishr said he is bullish on prospects for a sovereign re-rating for India over the next year or so.
Policy rates, liquidity
Mishr expects the Reserve Bank of India (RBI) to hike key policy rates by 50 basis points each at the upcoming 27 July monetary policy review, against a general consensus of 25 basis points.
“If at all RBI decides not to go with 50 basis points at the policy, it will be more due to the global situation than what is happening here on the growth front,” he said.
The central bank will ensure that the system has adequate liquidity, but does not expect a return to a large surplus.
Banks used to have an average cash surplus of about Rs60,000-80,000 crore until late March but have recently been borrowing from the central bank due to a temporary liquidity crunch.
“If at all they (policymakers) want to manage liquidity it will be to prevent asset bubbles than to do anything else and asset bubbles in the more vulnerable parts of the economy, which is capital markets, real estate,” he said.
Impact of yuan revaluation on India
China’s decision to gradually let its currency appreciate is unlikely to help India much in the near-term. The fact that the rupee has been appreciating even when the yuan has been stagnant has lead to some loss of competitivness for India, he said.
“I do not expect to see a sharp appreciation in the yuan. I would be surprised to see anything above a 1 to 1.5% appreciation until March. I think it will cause ripples for the rest of Asia,” Mishr said.