Foreign investors aren't seeing India with as adverse a prism as we are: Hitendra Dave

MD & Head of Global Markets (India), HSBC

Hitendra Dave, managing director & head of global markets, India, HSBC believes that despite the currency depreciation and equities outflows, India is far from a sovereign downgrade.

In an interview with Sneha Padiyath, Dave speaks about the RBI’s measures, how FIIs view India and what’s in store for the rupee and equities.

Do you think the RBI’s measures so far have been good enough to stem the rupee fall?

I think the RBI’s attempts to use interest rates and liquidity policy appear, at best, to have had a marginal effect on the currency. There is a sizeable section of the market which from the beginning felt that the use of the severe interest rate and liquidity tool  may not help the currency much.

But it may have significant collateral damage on the fixed income market, equities market and also wider issues of growth.
Some of the other measures taken by taking off the dollar demand from the market are really stop-gap arrangements. You have to hope that it addresses the demand-supply imbalance for a few weeks or months.

So, you think these are really cosmetic measures then?

No, these are measures that are necessary to address the demand-supply mismatch for US dollars right now.  Increasing supply is a big challenge in the current environment. On the demand side RBI is working to remove oil demand. They have removed gold demand.

There is the natural shrinkage of imports because of the slowing economy. Adverse exchange rate is also resulting in slowing demand. But that is getting more than compensated by significant reduction in exporter selling and unfortunately in equity outflows.

The feeling among a section of the market participants is that a sovereign bond issue now would signal that the government has no other weapon left in its armoury to combat the rupee fall. What are your thoughts?

I think it is a very bad idea for India to issue sovereign bond in the current environment. People who want to express a negative view on your country will short your stocks futures, start selling your currency. They could then start selling your bond also and then that would push up yields by 40-50 basis points.

Small volumes create significant gap-outs and then we just respect it. The timing is just inappropriate as we will not be able to get good pricing and it will also set a very poor benchmark.

Further, we don’t really need the money as the RBI already has a large reserve pool.

In your interactions with your counterparts and clients overseas, what's the sense you are getting about their views on India?

We, in India, are seeing ourselves through a much adverse prism than the offshore investors.

They think that at worst case, we will grow at 4%; in good case 5.5%. It may be less than the potential but we are still far better off than a vast part of the world.

Also, they see that some things have been set into motion which will only take a long time to address like reforms in coal-linkages, power sector reforms and others.

Are you expecting a sovereign downgrade?

I think it’s a low probability as the case for a downgrade is just not there. If fiscal health is as promised, if reforms are better than what it was 6-9 months ago, if the government shows a bit more stomach for unpopular decisions, we are not giving the rating agencies anything on a platter for a ratings cut.

Our external debt-to-GDP is much lower than similarly rated entities. There are actually improvements taking place on the external front.

But rating agencies tend to come under market pressure sometimes. If the market has downgraded you significantly, do they want to follow suit is what we need to see.

Where are the markets headed?

The currency will recover a bit. The trigger for that would be a big wall of money which the financial market sees and therefore stops pushing it further.

I think there will be a split to the stock market. Companies which have good franchise, good management, no cash-flow problems, no leverage issues will do well.

For the huge section of the market which is building out ports, roads and bridges, which is where we need the extra capital, those I think are in a serious problem.