Hitendra Dave, managing director & head of global banking and markets at HSBC India, believes rising oil prices are a negative for India, but not a big concern so far. He expects the Reserve Bank of India (RBI) to prepare the market for an interest rate hike at its monetary policy meeting in June, but he believes a hike is not warranted. In an interview, Dave also said concerns on the rupee touching 68 per dollar is unfounded as current account deficit is just 2% of GDP. Edited excerpts:
How do you see Indian markets faring, as compared with other emerging markets for the rest of this year, specifically considering the high oil prices?
When the world’s largest central bank starts removing accommodation that the system is used to for almost 10 years, and not only raises rates, but reduces the amount of liquidity, one would expect that at the global level, all assets prices will reflect a bit of that. That said, which individual country, people would choose to withdraw more from or less from is a function of the individual countries.
Oil is a problem for India, but unlike the scene a few years ago, when oil prices were above $100 per barrel, the difference between then and now is that we were all sheltered then as consumers. The entire pain was taken by fiscal (channel) and OMCs (oil marketing companies), and fiscal channel took the pain by significantly borrowing a lot, which impacted interest rates, and there was higher supply of paper. Also, such borrowing was without any asset on the back end, and was inflationary.
Unlike the previous rounds of oil price hikes, where entire pain was felt through the fiscal channel and OMCs, this time those significant issues are not there. This time, it is about what happens to you and me as consumers.
So, it will be negative, but I don’t think it is hugely negative.
With crude touching $80 per barrel and inflation nearing 5%, have you changed your call on RBI policy expectation?
One would have to concede that what has changed between March and now is oil. Nothing else has changed. My base case assumption is that the economy needs a long pause in interest rates.
According to me, inflation is not the reason to hike rates. I see that RBI is increasingly getting closer to getting the data validation which is needed to hike rates. There has been significant tightness created by what’s happening in the government securities and fixed income market. To the extent that the intention of the rate hike is to create tighter monetary conditions, those have already happened, may be much more than what the rate hike could have managed.
Bulk of the tightness in the fixed income market has little to do with inflationary expectation or monetary policy expectation. It has local factors at play there. So, I hope we don’t get into a stage where the bond market is tight where it is telling RBI to hike and then RBI hikes and it signals the bond market. I hope it doesn’t get into chicken-and-egg situation. In June, one should be prepared for an indication from RBI that everything points to them to pull the plug.
What would be the implication of rupee beyond 68? Will RBI defend those levels?
I don’t think any central bank can defend a level like that. On the currency, some of the adjustment is good because some of the external factors have turned adverse. Our trade deficit has widened, current account is expected to be closer to 2% of GDP. But 2% is a manageable number. In fact, I have heard the RBI governor say that in the long run, our CAD average will be 2%. We will receive a reasonable amount of FDI (foreign direct investment) even if portfolio flows have slowed down.
What does the yield curve suggest?
On paper, it suggests a recession, because your short end is very high and long end is lower. But it’s not so. It just suggests individually where the supply is coming. Banks that need bond market to achieve their profitability targets are just selling wherever the bond is in the money.
How do you see the liquidity situation evolving?
It looks like RBI has very little opportunity to buy dollars this year, i.e. add liquidity. Normally, when you buy, liquidity is an incidental by-product. If the idea is to maintain an orderly or neutral liquidity condition, then it looks like they have no option but to inject through the INR operations, which is bond purchase. OMOs should be done only for liquidity and RBI will get more opportunities this year.
Is the economic recovery on track?
The consumer is in good shape, and he or she is holding up the economy. You are seeing it in the corporate results, commercial and passenger vehicle sales, two-wheeler sales, FMCG, housing at the user level, asset growth of consumer-financing led companies. Also, the sectors where government is stepping up—such as roads—is doing quite OK.
Private sector capex though, is still missing and that’s a very unique situation, where consumer is in good health, government balances are in good shape, inflation is low and stable.
Do you think corporate earnings recovery is on track for concrete recovery by the end of FY19?
I think it will be sectoral. Some sectors we are clearly beginning to see demand now. Operating leverage is coming into play. In those cases, we may see earnings delivering even positive surprises. Earnings of companies that deliver to consumers—selling to them to lending to them, that will not disappoint much.
However, in core sector with heavy leverage, nothing has changed.
Apart from state-run banks, some private banks have also been in the news for wrong reasons. Where are foreign investors really looking at in the sector?
India is one market, where there is a vast population that is still unbanked. I still think most people as long they have a long-term bullish view on Indian consumption story, they will use the financial sector as the proxy. You could continue to see consumer credit growth by high-teens, interest margins which are compensating the risk you take, etc.
I think people have an issue with certain sectors and certain types of governance. Those areas will be a no-go for a while.