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Mumbai: Sanjay Singh, head of global markets India, BNP Paribas says he is cautious on the Indian market over the near term because of macroeconomic challenges, but optimistic in the long term.

“We continue to remain optimistic about the long–term growth prospects for India and we believe that it is likely to outperform other emerging markets over the next 3-4 years," Singh said in a an interview on Tuesday.

“However, in the near term, we hold a cautious view given the macroeconomic challenges," he added.

India’s benchmark equity index BSE’s 30-share Sensex has lost 2.07% in dollar terms for the year to date, and is one of the worst performing among its peers in Asia.

Foreign portfolio investors (FPIs) are also worried about the overhang due to uncertainty around upcoming assembly elections in Madhya Pradesh, Rajasthan and Chhattisgarh before general election in 2019. Taking into account both equity and debt investments, FPIs have withdrawn as much as $9.35 billion from India so far this year.

“FPIs’ concern, specific to Indian markets, comes from the uncertainty around coming elections in three major states by the year-end and the general election by the middle of next year," said Singh.

“At a macro level, the overhang of crude and currency is impacting all emerging markets," he said, adding, however, that the good monsoon forecast augured well for India.

Brent crude oil prices reclaimed their $75 a barrel mark on Wednesday. India imports 80% of its crude oil requirement and rising crude prices could have a further impact on fiscal balance and forex reserves. The rupee has shed 6.18% for the year to date to Rs.68.08 per US dollar, and is the second-worst performing currency in Asia.

“...The rupee has been stable over the last couple of years. However, all emerging markets currencies including the rupee have depreciated recently, which has led to a sharp increase in hedging activity, thereby further weakening the currency," Singh said, adding he expects the rupee to remain around the 68-69 level against the dollar in the near term.

Singh said he believes FPIs continue to hold core portfolio for India but are trimming their trading portfolios and refraining from allocating fresh funds to India for the moment.

Among emerging markets that BNP Paribas covers in Asia, they are overweight on South Korea followed by China, Indonesia and India. “However, with the ongoing trade war between USA and China, we are in a wait and watch mode as it’s a fluid situation," said Singh.

FPIs have pulled out a net of $7.9 billion from debt market for year to date, almost matching the $8 billion pulled out for the entire calendar year 2013.

“Amongst the emerging markets, only India has witnessed strong outflows from the debt market. This is a culmination of several domestic as well as global factors, including higher yields of US bonds and higher crude oil prices, which has triggered concerns of fiscal slippage in India," said Singh.

Further, higher income in the farm sector resulting from increases in MSPs (minimum support prices) may fuel inflationary pressures, warned Singh.

“This coupled with tepid GST data and PSU banks shying away from the bond market has changed the dynamics of the bond market. It would appear that FPIs have withdrawn from the markets in anticipation of hardening of yields," he added.

Singh pointed that since the start of the year, BNP Paribas has had a contrarian view on repo rate hikes.

“Our economists expected two rate hikes in 2018, of which the first rate hike was announced earlier than we expected," he said.

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