Mumbai: The vice-chairman of Standard Chartered Capital Markets Ltd, Sir Thomas Harris, says he is convinced that the Indian banking regulator will take all necessary steps to prevent the economy from overheating. But to prick a bubble in asset prices, the regulator needs to raise interest rates which, in turn, will increase the flow of foreign capital and put pressure on the local currency.

Being bullish: Sir Thomas Harris says Standard Chartered Bank will look at both organic and inorganic expansion.

How do you see the impact of the global credit crisis on India?

The speed with which things have improved (here) is impressive. The government and the Reserve Bank of India (RBI) are to be commended for the measures they took. Last winter, RBI took a series of measures to stimulate demand by reducing interest rates and the reserve requirements. It is difficult to completely reverse the monetary policy and tightening it.

My bank continues to be bullish about the economy, given the savings and investment demand here.

The biggest change that I could see after the crisis is that the West has finally recognized that India is now a major part of the policymaking and regulatory processes towards global financial and economic stability. A year ago, India was not a member of some of the international bodies for financial matters, but now it is.

The inflows from foreign institutional investors (FIIs) have been rising.

The appetite for emerging market stocks has increased and the foreign capital inflows are growing rapidly but the problem is that much of these are taking form of portfolio investments and not FDI (foreign direct investments) that is long-term in nature.

The ministry of finance and RBI are concerned that once the economy rebounds to a sustainable growth trajectory, and the interest rates rise, India will become even more attractive destination for FII investments. But the government doesn’t want any pressure on the rupee due to growing (foreign capital) inflows.

The dilemma for India is, how to direct these investments into long-term or direct investments. FDI inflows will definitely go up but the balance (between FII and FDI inflows) is not yet right. The authorities have to deal with this issue next year.

As the bull run continues, do you see another bubble being formed?

The finance ministry and RBI is certainly sensitive to this risk. I don’t think RBI is blind to this issue and they would take all necessary steps to prevent such a situation.

The dilemma is, how to prick a bubble in asset prices, either in real estates or equities, as it would mean (an) increase in interest rates that leads to further influx of foreign capital.

I don’t think the monetary authorities in India will allow any serious asset bubble that could hit the future economic growth. But India needs to have a balanced and deeper capital markets. We need other form of capital investments like corporate bonds.

Is the demand for exotic derivatives and structured products coming back?

There is always a place for structured products and derivatives and other hedging instruments. As large Indian companies become more sophisticated global players, they would also need (a) more sophisticated system.

The reason that we have come out of this crisis not just in good shape but in a better shape is because we were focused on our strategies and never got swayed by temptations of dealing in exotic derivatives. Our objective is to become the best international bank in Asia, Middle East (West Asia) and Africa. We are not driven by the markets in London and New York.

Has the season of outbound mergers and acquisitions begun in India?

There was a pause last year, and we have seen a couple of big disappointments. But the Indian companies are well positioned now to look for these activities. The rise will be sluggish in the next three years, and India will look more into other emerging markets for acquisitions, rather than developed markets.

This is because the prospects of returns and margins will be higher in emerging markets. But the demand for Indian services will continue to be there in the West.

Would you look at inorganic growth in India?

Our wholesale banking services will continue to grow rapidly. We merged the private banking business of American Express Bank with ours two years back and that has added enormous potential to our growth in India. We are meeting the needs of the Indian middle class.

The consumer banking services demand is there, but we are more constrained by the size of our branch network, which obviously doesn’t match with other Indian domestic banks.

So we will continue to grow our corporate finance and private banking businesses, but expanding other businesses will depend on the clients’ demand. We always look at both organic and inorganic expansions, but we will be careful. Out of every 100 investment opportunities, we proceed with one.

Would you re-enter bidding for assets of Royal Bank Scotland?

Some of the British banks were not cautious about acquisitions and faced disastrous consequences. So we want to be very careful about what we are buying and the price, and if that means we have to look away from an attractive proposition, we will do that.