‘India better placed to weather the impact of Fed rate hike’

While uncertainty continues to shroud the global markets, India is still the best investment destination in the emerging market basket. In a special panel discussion in Singapore coinciding with Prime Minister Narendra Modi’s visit, Bloomberg TV India’s Abha Bakaya speaks to Schroders Asia head of fixed income Rajeev de Mello, Moody’s Investors Services’ economist Atsi Sheth, RV Capital Management founder and CEO Ronnie Roy and Meinhardt Group CEO Omar Shahzad on the outlook for India in the wake of upcoming Fed rate hike, China slowdown and the ongoing reform pace.

What are your thoughts on the supposed Fed rate hike this year?

Rajeev : Well it’s the most flagged event probably of the year for the financial market and I think it’s also the most anticipated. And the markets have, largely, the time to price it in. So on our side, we expect a 25 bps hike in December and I think that is pretty much consensus now. Since May 2013, the market had time to prepare. First it was a bit of a shock. But then we had various periods that have been a bit difficult for emerging markets. But I think most investors now in emerging markets either exited as they don’t want that risk or have prepared their portfolios. So I don’t think that will be much of a surprise. The surprise will really be on how much the Fed hike subsequently will be rather than when the first hike is going to be.

What do you think is the quantity of the rate hike that is going to be important going forward?

Atsi : I think its two things — one is the hike itself and what it means for cost of capital, and how that will rise concomitantly with Fed rate hikes as well. But the flip side of the Fed deciding to move forward with the lift off is that growth appears more positive than it did a couple of years ago. And that’s equally important particularly for emerging markets that do struggle when global growth, particularly in the US and Europe, seems more subdued. I think that’s the flip side of it. And if indeed the hike proceeds, as we expect slowly, but growth proceeds in a much more positive manner, I think that would be the upside for the emerging markets.

And do you also feel that considering the diverging monetary policies around the globe, any kind of negative impact of that Fed rate hike may actually be offset by easing from other central banks?

Rajeev : Yes, I think so. I think what Japan’s doing and what Europe has been doing and has announced to do more, of quantitative easing, perhaps lower interest rates. European Central Bank President Mario Draghi has been very clear most recently about his intentions on getting inflation higher and doing whatever it takes to get that level up — that does offset partly what the Fed is about to do. So that is a temporary effect of course. It does add complications to the easy policy in Japan and Europe, that means the dollar will be stronger. So often a higher and stronger dollar exerts a lot of pressure on other countries in the emerging markets.

Where does this put India in terms of global risk? How do you perceive the situation currently? Do you feel India is relatively insulated or you feel some of these factors are a risk that needs to be considered?

Ronnie : Well, India is in a really good position on account of 2013 adjustments we had to make dramatically. Amongst the EM (emerging market) students so to speak, India probably is the best student in the class right now. It has a lot of things going for it — a reform-oriented government is one. Obviously, the demographic dynamics is pretty well known. So amongst the EM world, with a reasonable reserve and current account deficit within control, I think India is in a reasonably good position and, therefore, will be buffeted from any emerging market risk that might strike the rest of the world.

As you also engage in a lot of work in the Indian market, how’s the sentiment changed? Do you see a notable difference in the last couple of years under the new government?

Omar : Absolutely. I think over the last year and a half, we see a lot of international clients of ours looking to pursue Indian opportunities a lot more vigorously than they did in the past. There’s a lot more interest, especially in this part of the world than Singapore and the Far East. And, of course, we are motivated by what we see as far as the headline data is concerned. Economic growth in India now is far higher than many other parts in Asia and Middle East and the inflation rates seem to be down.

Among the emerging markets, we have seen a lot of outflows in the last 10 weeks, perhaps bracing for the Fed. Do you see that situation turning?

Rajeev : I don’t see that turning in the short term. Investors aren’t going to ramp up risk ahead of the end of the year. There is only a few weeks left. They are not going to ramp up in an environment with lots of uncertainties. However, beyond that, I would say investors would start becoming more confident of the emerging markets.

The zero rates in most developed parts of the world are really an incentive for investors to take more risk.

In the emerging market basket, how does India stack up? Do you still see India as the bright spot given the current growth rate? Would you like to see growth at a faster pace?

Atsi : We have a positive outlook on India. That is a relative statement in terms of credit risk specifically. India does stand out, particularly among the emerging markets of Brazil, Russia, Turkey or even Indonesia. The burden of that is, now there is lot of expectations on India both in terms of growth and policy. We have seen sentiments towards emerging markets as a whole being quite negative over the last year because of commodity prices, Fed lift-off and China’s slowing.

If we look at India it would seem that it is relatively insulated from all of these three compared to its emerging market peers. Even so, the last few growth data have disappointed. In terms of reforms, our own view was reforms would proceed slowly and that is what has happened. But markets have expected a faster pace in terms of certain policy announcement particularly. So I think, yes, India does outperform in some way but the expectations perhaps run even ahead of that.

How much of a role does China play in tempering the move for emerging markets?

Ronnie : China plays a very important role. Amongst all the central banks we have talked about cutting rates, China is one of the big ones. China, at the end of the day, has the second largest by PPP. So, any slowdown in China impacts the rest of the world’s growth. And that does affect the external sector from India’s perspective in terms of sentiment as well as actual flows.

But at the end of the day it is a double-edged sword for India. India can’t benefit from standing out in terms of least half a decade or so as being one of the fastest growing emerging market economies overtaking China, and, therefore, will get a fairer share of FDI investments coming into India.

In terms of potential, where does India really stand?

Omar : India is not a new market for lot of foreign investors. Based on what everyone here is saying is that India is quite attractive at the moment relative to other markets? People are prepared to look at India from a different perspective and the strategy now seems to be of partnering with local companies. So everyone is looking at India. You see the Singapore government making several big announcements and same is going with other Asian countries. So my sense is that when you see the slowdown in China or other parts of Asia, India does seem to be quite a favourable and attractive country.

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