Weakness in rupee will constrain capital flows into India: Sanjay Singh

SANJAY SINGH, head of global markets at the Indian arm of BNP Paribas, the French international banking group
Weakness in the rupee, surging bond yields in America and the US Federal Reserve's interest rate hike forecasts will constrain capital flows into India, says Sanjay Singh, head of global markets at the Indian arm of BNP Paribas, the French international banking group. Political uncertainty is also weighing on investor sentiment, says Singh. 

Edited excerpts:

What are the key concerns for the market at this point?

Spiraling crude oil prices, issues in the banking sector, the pace of policy reform and the coming state elections. The increase in oil prices is one major concern, with a section of the market fearing that if oil marketing companies are asked to absorb future retail fuel price increases, this could point to a reversal of the government’s reform agenda. Volatility in the rupee and in the bond markets have added to investor concerns.

What’s the foreign portfolio investor (FPI) flow outlook?

Given our forecast of three more rate hikes in 2018 by the US Federal Reserve, there is a high possibility that emerging markets (EMs), including India, are likely to see pressure on capital flow. For India, specifically, we are not overly worried on this — over the past 12-18 months, we have seen a rise in domestic flow, which has been able to counter the FPI flow pressure. 

What is the mood of foreign investors towards India?

There are some concerns but the overall structural growth story for the Indian market remains intact in the mind of investors. At BNP Paribas, we continue to remain overweight on India. As we head into multiple state elections, leading into the general election in 2019, investors’ key concerns are increased political uncertainty and possible populist measures. As a result, some are in a wait-and-watch mode.

Are recent policy decisions such as the new tax on equities or curbing of offshore trading in Indian products impacting investments?

While investors initially expressed concern about the long-term capital gains tax, the market has already taken this in its stride. There has been an impact on flow to some extent, but investors are not shying away, given India’s longer term structural growth story.

In the case of curbing of offshore trading in Indian products, we find investors who used to hedge their long India positions on the Singapore Exchange (SGX) might initially be forced to reduce their positions, as they await clarity on the transition and how the proposed collaboration between SGX and the National Stock Exchange will work operationally.

How much of the forex exposure of corporates is hedged? How is the rupee weakness impacting firms with unhedged positions?

We believe many companies with long-term liabilities are under-hedged, owing to the rupee staying in the range of 63-66 against the dollar in 2017-18. The current account deficit at under two per cent (of gross domestic product) and a positive balance of payments had further enhanced this stance. The recent weakness in the rupee demonstrates that the year ahead is going to be lot more volatile and moves are likely to be sharper. We are seeing some concern from corporates regarding their unhedged positions and there is likely to be a higher level of hedging in the near term.

What is the rupee outlook?

Our forecast currently stands at 66 to the dollar for 2018 and 67 for 2019.

If the rupee continues to slide, will RBI be able to stem the weakness, given the forex reserve situation?

RBI does not track depreciation in the rupee only against the dollar but against a basket of currencies. So, if the dollar strengthens across all EMs, the RBI will allow some weakness in the rupee. Its forex reserves are now more than $400 billion. This is likely to give RBI enough scope to arrest any steep fall in the rupee from here. However, RBI does not target any specific rupee level. The intervention, if and when it happens, is to stem sharp moves on either side.

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