Rupee has hit a bottom, may gain in year ahead
We had a challenging start. If you look at the equity markets, FX markets, there are a lot of questions regarding economic growth in India this year. However, looking further ahead, we are a little bit positive. We think pessimism has been overdone and that this might mark the bottom in terms of financial sentiment.
The Indian markets have seen pronounced weakness. Can we see fund flows and interest back post state elections and the budget?
Critical for financial markets is that equity investors come back to India and we remain relatively optimistic over the course of this year. It is hard to judge the timing because it is not just in India's hand. It is also dependent on what happens elsewhere in the world. For example in Europe, it probably will take a few more months for clarity to emerge. Therefore, the second quarter of this year might be the time when things stabilise in financial markets in India.
Indian rupee has been range bound or fairly weak. Since August, it lost close to 16%. What is your outlook going forward?
This might actually be more or less near the bottom for the currency. A lot of bad news is priced in. We saw sharp depreciation. Capital has already left India. So now as inflation stabilises, growth reaccelerates in the second quarter, the currency itself has found bottom. If anything, it might actually gain a little bit in value going forward.
There are a lot of expectations about a rate cut in India in the first or the second quarter of FY13. Do you subscribe to this view? Do you believe that the central bank erred by sticking with the high interest rates?
It was important that the RBI delivered high interest rates and kept them high because India has had a very stubborn inflation pressures over last 2 years. It is important for central bank to gain credibility to put a marker and keep interest rates relatively high.
It is perhaps a little bit too early to cut them yet. We need to see clear evidence that inflation is coming down. It will come down, but probably not before the second quarter and therefore we think first expectations of cut this quarter are a bit early, it may take a little bit longer than that.
What are your expectations as far as GDP growth goes?
It will accelerate again over the second half of this year. This particular quarter might be the weak point for India. We realise there is a lot of scepticism about India's growth prospects. However, if you look at the PMI indicators, HSBC's PMI for example in December for services and manufacturing picked up as well as exports seem to be doing quite well.
In fact, the weakness of rupee should help exports as well. We are not entirely sold to the idea that growth is going to fall off a cliff. If anything, it has hit bottom and might reaccelerate over the second half of the year.
Do you believe inflation has peaked in India?
Yes. Inflation has peaked. The question is how quickly will it come down. Food prices, for example, are falling. The critical thing is not just food prices at this stage, it is also non-food prices, that is so-called core inflation prices. It will take a little bit longer.
By the middle of next year, there should be clear evidence that inflation pressures are being wrung out of the economy. The central bank may then cut rates, but we should not be too impatient at this point. It does take time for inflation to ease out.
Keywords:equity markets, FX markets,economic ,Indian markets, budget,financial markets , equity investors , currency, RBI delivered , interest rates, PMI indicators, HSBC's PMI ,Food prices.
