I always advocated a tighter monetary policy in India. Many Indians, especially those related to the stock market would always criticize former Reserve Bank of India (RBI) governor, Raghuram Rajan, about his tight monetary policy, I applauded him because he stabilised the rupee. While he was the RBI governor, the Indian currency was stable. Now, it is no longer stable as it used to be. In the near-term, the rupee appears oversold but will continue to go down over the longer term.
So, how low can it go from here?
In 1990, the Indian unit was around 12 against the US dollar. In 2008 – 09, it was close to 39 levels and since then, the trend has been down. I am sure the rupee will go over 100 levels. But, will it go over this level in six months or in 10 years is a debatable question. I don’t think it will hit 100/$ in the next six months. But it will hit this level in the next 10 years.
What are your views on the emerging markets (EMs)? How long can the India outperform the EMs?
Emerging markets are relatively inexpensive compared to the developed markets. If one was to compare the valuation of emerging market stocks to the US, they do not appear cheap. However, one needs to evaluate on a case-to-case basis. In India, there are stocks that are trading nearly 50 times earnings, but other markets have currency related problems and weakness in stock prices. For example in Turkey, Brazil, Argentina, Mexico, South Africa and in some Asian markets, there are stocks that are not terribly expensive. But they are not as cheap as compared to 2009.
I find Indian stocks expensive. If I have to take a bet, I would rather believe that they would go down than go up in the next six – 12 months. India’s outperformance is purely in rupee terms. Measured in dollars, this outperformance is not much.
The recent economic release pegs the Indian gross domestic product (GDP) for the first quarter of financial year 2018 – 19 (FY19) at 8.2 per cent. Do you believe this data?
GDP growth is a very questionable measure of a country’s prosperity. In the US, the GDP is increasing but the level of credit is increasing at a more rapid pace. Without the deficit of the US government, there will be no economic growth. This is a flaw in the measurement of GDP. Secondly, I measure GDP in India in US dollar terms, there has been no growth. Well, you may turn around and say that it is not fair to measure Indian GDP in US dollar terms. It should be done in local currency. But then, my argument is that one needs to measure Argentina’s economy in local currency as well. At that rate, their economy is growing at 30 per cent per annum! These are things that are really difficult to measure.
How long can Indian economy grow at this pace?
There has been growth in India and the prospects for the Indian economy are quite good in general. That said, India is not problem-free. Narendra Modi is building a number of new cities in the country-side. All this causes a lot of hardship to people who live on the land where the cities are being built. If everything goes well, Indian economy can grow at 7 – 10 per cent per annum. However, I am not entirely optimistic that this will be the case. A lot will depend on how we measure it – local currency or US dollar terms.
What are the ingredients for a further stock market rally from here on and a healthy economic growth?
Political stability is important. I know Mr Narendra Modi has a lot of critics. At the same time, he has been doing something. All the ‘Gandhi – related’ clan were doing nothing. They were ripping off the country and stealing money. Narendra Modi is a pragmatic leader and has introduced reforms, including a toilet-building boom. It is very important that the citizens have proper toilets. In an urban economy, you need proper hygiene. But the other previous Prime Ministers focussed on this very important thing.
Do you expect the RBI to continue on its rate hike path?
In my opinion, they should increase rates. I have argued for a number of years that the most important thing for India is to have a stable currency. That’s the most important. If the currency is weak now, it is due to over consumption, fiscal and external deficits. The RBI should tighten the monetary policy. It may not be good for the stock market. However, a majority of Indians do not live by the stock market and do not own any shares. As an investor, I hope the stocks go down and provide a buying opportunity.
September 2018 marks 10th anniversary of the global financial crisis. Have the financial markets – globally and in India – learnt any lessons from what happened 10 years ago?
Unfortunately, I don’t think that the global financial markets have learnt any lessons. Maybe, some US banks have learnt a lesson and been more prudent in their lending practices. But I don’t think investors have really learnt much. The governments have not learnt anything; and certainly not central banks in the sense that they still deny the causes of the crisis. The crisis was caused by too much leverage in the system. The credit had expanded too rapidly, and as this happened, its quality went down. So, there were a lot of bad debts, especially in the lower quality credit. Today, we actually have even more debt as a percentage of the global economy that we had back then in 2008. That said, some sectors have deleveraged. The housing sector in the US in terms of borrowings has deleveraged. But then, we have student (loan) debt, credit card debt and auto loans etc, which are not of high quality. That apart, we have a credit bubble in China that did not exist in 2007.
Do you expect another crisis of similar magnitude going ahead?
Well, the next crisis may be worse. The global financial crisis in 2008 was triggered by excesses in the US housing market. However, the bond markets were not exposed at that time. The treasury yields were around 5 per cent then. This yield in peak 2016 went to a low of 1.37 per cent and are back to 3 per cent now. Bond yields in Europe stand at 0.37 per cent in Germany, 0.7 per cent in France, in Switzerland we have a negative yield on 10-year bonds. In Italy, Spain and Portugal, these yields are essentially lower than in the US. In Japan we have zero interest rates.
Around the world, we not only have a stock market bubble, but the bond market is also in a colossal bubble. Some even argue that the US stock market is also in a bubble zone. The market –capitalisation as a percentage of the economy is around 150 per cent. This is one of the highest levels ever. Even in India, there are stocks that are trading nearly 50 times earnings. The real estate market in Hong Kong and Singapore and select places in the US are also in a bubble zone. However, this is not the case with the commodity market yet.