The stock market and the rupee seems to be moving in tandem, says Naina Lal Kidwai, country head - HSBC India and president of Federation of Indian Chambers of Commerce and Industry (FICCI). She says it is remarkable how closely the Indian market is following announcements in the US - issues around QE tapering, recovery of the US economy. Also other EMs are moving in tandem with India and responding to the same set of issues, she adds.
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Kidwai told CNBC-TV18, a good monsoon is a big positive for the Indian economy. The depreciating rupee is also beneficial to some extremely important sectors such as IT and pharma.
Below is the verbatim transcript of Naina Lal Kidwai's interview on CNBC-TV18
Q: It has been a very, very difficult week as far as both the stock markets and the currency markets are concerned. We have seen some degree of stability return to the stock markets and the rupee. Do you believe the worst is behind us and as far as the currency is concerned that we have topped out?
A: It is very early days to really comment on that. Clearly we see movement, both the stock market and the rupee are moving in tandem, so the two are clearly linked and a lot of it has to do with the sentiment in the market. What is also pretty remarkable is how closely our market follows announcements in the US now and any issues around QE tapering and recovery of the US economy impacts us here. The other factor that is quite interesting to watch is other emerging markets (EM) that again tend to move in tandem with India responding really to the same set of issues, such as announcements out of the US.
Q: We heard the Finance Minister speak yesterday. He said he is hoping for a pick up in Q2. We also heard from the Reserve Bank of India (RBI) in its annual report and they are hopeful of a recovery in the second half. Do you believe the good monsoon is going to be good enough to offset the poor Index of Industrial Production (IIP) data, poor manufacturing sector growth and do you really see a recovery in the second half starting with Q2?
A: Hard to say. A good monsoon is always good for India. A good monsoon will benefit certain industries, as we know those would be the input industries that go into the sector. There are many moving parts here. You take fertiliser. It benefits from a good monsoon but it also has a negative effect on import costs that feed into it, because these are very energy-intensive industries. You will get this mix. So it is hard to say industry by industry and actually at FICCI we are doing an analysis to really see which industries get impacted by which aspects of these movements, because there are many, many moving parts. Yes, the good monsoon is a big positive.
A devaluing rupee does bring benefits to some sectors and very important sectors for India that have driven growth like IT and pharma. These are very big sectors for India. Some of the activity around the Cabinet Committee on Investment (CCI) and the approvals coming through there are very important. If government can just ensure that they come back into the real world of investments moving ahead and that the projects post approval come back into production.
Q: I also want to ask you what do you anticipate in terms of Raghuram Rajan's key challenge, because it looks fairly clear with the way banks have been hiking their base rates given the economic situation at this point in time that he is going to have a tough time holding onto rates and industry has been saying, you cannot move on rates because that is going to throw the growth curve completely out of whack. What can Raghuram Rajan really do?
A: I think in Raghuram Rajan we have a brilliant economist who I guess we are all hoping is going to pull a rabbit out of a hat, not an easy expectation from anyone as he goes into his new role. Clearly as you rightly point out the dilemma here will continue to be how do you bring interest rates down which is really the need of the hour when you have all of these other issues and I think we would be lucky and I am hopeful that we will at least see interest rates stay where they are, not go up. But clearly there is upward pressure on interest rates given some of these developments.
What we have seen from RBI is some of the actions on making sure that long tenured bonds and some of the actions at the long end of yields is clearly beneficial enabling banks on mark-to-market (MTM) of the way they will measure these bonds back into their financials, some reprieve there. I think the practical steps which are important, but again there are concerns around companies that have high borrowings, companies that have high external borrowings which maybe unhedged and we have to ensure that the Non-Performing Assets (NPA) do not mount to a level where that in turn brings higher interest.
