India should focus on controlling current account deficit: Uday Kotak

Domestic competitiveness will 'ultimately' determine progress in that task, he says

India should focus on keeping its “current account” under control as it cannot afford vulnerability in uncertain times, said Uday Kotak, Founder & Director, Kotak Mahindra Bank at Business Standard Manthan Summit on Thursday.

 

India’s current account deficit is 1.2 per cent of the gross domestic product. While India runs a trade surplus of around $40 billion with the United States, it is over $80 billion with China.

 

“What are we going to do about the mix of our current account, especially if the United States wants to equalise? Some of it would be substitution, but some of it may have a net impact. Answer to the current account deficit ultimately is domestic competitiveness,” said Kotak, adding that India has to dramatically improve its return on time invested, or ROTI, and improve the competitiveness of its industries that have had a long innings of protectionism.

 

India should have a sound strategy to counter outflows of foreign money. According to Kotak, after Donald Trump’s victory in the presidential election, the US dollar has been acting as a suction pump. As this pump moves the other way, it is bound to create pressure in various countries.

 

“India has been a very positive recipient of international flows. The FPI (foreign portfolio investment) flows at market value today would be $800 billion. Value of FDI (foreign direct investment) in listed and unlisted stock would be close to a trillion dollars. India’s external commercial borrowings is at about $700 billion. Therefore, if you take the total stock of capital repatriable assets, which India has attracted today, is about $2.5 trillion,” said Kotak, adding that India’s net foreign exchange reserves are very comfortable at $550-600 billion. “Therefore, we are in a very good position to counter it.”

 

“The key question is, if US interest rates remain around 4.5 per cent for long term and dollar becomes the continuing dominant currency in the Trump world, India must have a strong game plan such that if a small percentage of $2.5 trillion has an exit, what would be our counter measures from a policy point of view.”

 

The choice for India would be to either use its foreign exchange reserves or let the market find its level. If India decides to use its reserves, then it has to ensure there is enough domestic liquidity, Kotak said.

 

“I think I do believe we will reach a point where Indian valuations will start getting to be very attractive and I don't know when therefore I don't want to comment on levels, but at that point of time we would probably see us a significant opportunity coming back into capital markets as we go forward.”

 

Kotak also said that while it's encouraging to see the Indian saver transition into an investor in recent years, they often invest without fully understanding the valuations at which their SIPs are being made.

 

“When you move into a world of free markets, you have to be very ready both as investors, practitioners and policymakers that markets can go up and markets can go down. And ideally, do not get involved in trying to manage that or manipulate that anyway,” said Kotak, adding that over a medium term, risk and return find an appropriate equilibrium in the context of a market.

 

(Disclaimer: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd)