Stars aligning in India's favour with an accommodative central bank, weakish dollar & low rates: Gokul Laroia, Morgan Stanley
Consumption and private investments in India need to pick up for sustainable growth, says Laroia
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"Markets are often leading indicators and markets are pricing that. My concern is that if it doesn’t happen, and we have a couple of quarters of poor growth and earnings recovery not fully materialized, the risk is much higher," he said. India should remove restrictions on certain derivative products, which would enhance foreign portfolio inflows into the country, he said.
How are foreign investors reacting to the Narendra Modi government's victory?
After the elections, the overhang associated with a potential coalition or split mandate has gone. The big issue is how this will translate into policy action that will have an impact on growth. The GDP numbers for the first quarter were actually not good. So, people are closely watching what the new administration is going to do to revive growth. One of the things the Modi administration has done is that the macro variables have actually been managed pretty well. But, consumption and private investment have to revive and without that, I don’t think we will see sustainable growth.
You have got an accommodative central bank, weakish dollar and low interest rate and low oil. I think stars are aligning in favour of India. After elections, expectations are very high and there is a view that we are coming off a low base and we should improve. The broader thing is that private investment should recover. That has been missing over here. That’s the biggest challenge and the biggest opportunity.
How do you see the current credit situation and the NBFC crisis? And what are the expectations from the Budget?
People are expecting something that will allow state-owned banks to start lending again. The reason is credit transmission mechanism will sort of recover either through increased confidence or increased liquidity, or recapitalized banks. We have a view that consumption is directly related to the availability of credit, but availability of credit after the NBFC issue has dried up. I don’t think they have recapitalized the banks to that extent that they can start lending again. Once it starts happening, and there is a restoration of confidence in the system, we see the whole NBFC issue resolving itself.
What is your view on the slowdown in auto sales?
The recent weakness is much more a reflection of economic conditions — availability of credit, cost of credit and more importantly, uncertainty about the future. It’s a worrying trend. And auto sales are a benchmark of consumer confidence.
The trend in the past few years has been higher FDI and relatively muted FPI flows. Is that here to stay?
FDI is driven by broad strategic considerations and that will continue. There is a general view globally that foreign companies would like to have a presence in India, given its scale and growth. For a whole host of regulatory reasons particularly in the technology sector, a lot of global tech firms or consumer businesses don’t have a presence in China. These are two large economies in the world and if you get a chance to have a presence in India, it’s a great thing.
However, portfolio flows tend to be more volatile. It is more impacted by structural considerations. India’s weightage in MSCI index is a little over 9%. Investors have historically been overweight on India and improving India’s weightage on the MSCI index is an important consideration and a function of improving market access.
In India, access to market has been impacted especially for the long-short hedge fund managers because they are restricted in terms of their ability to actually hedge exposure. Swaps on offshore derivative instruments have been removed. As a result of that, a lot of long-short investors cannot effectively hedge their portfolio. So, their exposure to India gets significantly impacted.
What do you make of US Fed's statements and market talk of three or four rate cuts? This is a sudden reversal of what we have been seeing and hearing since 2015?
The markets are increasingly beginning to price rate cuts — around 75 bps over the next 12 months. That’s been driven by a combination of recent global and US data that point to the global economy slowing. And most important has been the global PMI showing a declining trend month on month. Two-thirds of global PMIs are in the contractionary territory. So, global economies are in fact slowing.
What is the impact of the trade war and tariff increase so far on the Chinese economy?
The big overhang is uncertainty around trade. The longer this lasts, the worse it gets and higher the probability of the Fed cutting rates. That’s why they recently came out and said they will do what it takes to sustain growth. I think the focus was primarily on the trade situation. If the trade conflict escalates or extends for the next 6-12 months, there is a possibility that the US economy will be in recession. It is certainly going to impact the Chinese economy. And if the US, which is a $20 trillion economy and the China which is a $12 trillion economy, slow down, and together they account for 40% of global GDP, then obviously global economy is going to be impacted.
Is the worry just about trade?
Trade plays a major role and it is our belief that if the trade situation does get resolved satisfactorily, global growth could potentially stabilize.