HSBC: Pressure on rupee and Indian equities to continue
The
Hong Kong and Shanghai Banking Corporation Limited (HSBC) is one of the
largest banking and financial services organizations in the world.
Headquartered in London, HSBC's international network comprises over
10,000 offices in 83 countries and territories in Europe, the
Asia-Pacific region, the Americas, the Middle East and Africa The banks
origin in India date back to 1853, when the Mercantile Bank of India
was established in Mumbai. Since then, it has steadily grown in reach
and service offerings, keeping pace with the evolving banking and
financial needs of its customers.
To know more about the
HSBC?s view on Indian and global economy, Capital Market's Sachin
Dabhade & Yogesh kulkarni spoke to Robert Prior-Wandesforde,
Economist, HSBC, Singapore
Industrial production
numbers in India have recently touched 6 year lows. Does it look like
it was just the base effect or do you think that the target for
industrial production should genuinely be scaled down for the next few
months?
The downward move in Indian industrial
production is not simply a function of base effects but weaker demand
as well. Output growth has been trending lower since the beginning of
2007 largely as a result of the lagged effects of higher interest rates
and softer growth in the developed world. We expect it to remain under
pressure for some time yet.
India?s headline fiscal
deficit excluding off-budget items is significantly higher than the
region as a whole. Does this signify an extra bead of worry going
forward?
Yes, I think it does, particularly when one
considers the extra costs that will flow from the agricultural loan
waiver scheme and the implementation of the Pay Commission?s
recommendations. No doubt the government would like to spend more money
to limit the rise in inflation and compensate those worst affected by
the strong increase in prices, but is somewhat limited in what it can
do given the prospect of a sizeable budget overshoot. A relatively high
budget deficit, combined with a rapidly rising trade deficit and high
inflation is leading to upward pressure on bond yields and downward
pressure on the rupee and the equity market.
What is
your outlook for capital flows in India- both investment and portfolio,
given that a macroeconomic slowdown is emerging amid signs of rising
inflation in next few months.
The story so far this
year has been one of portfolio outflows but strong inward Foreign
Direct Investment. This seems a sensible reaction to what are likely to
prove reasonably temporary problems in the economy. India?s highly
favorable long-term growth prospects are not in doubt, but the economy
has clearly run into some cyclical difficulties, along with much of the
rest of Asia.
The Asian central banks are
grappling with runaway inflation and are being led to pursue a tight
monetary stance even at a time when the economic growth is slowing down
due to adverse global environment. Are the macroeconomic responses by
these banks likely to be the same going forward as well?
Headline
inflation in most Asian countries looks to set to rise further over the
next few months, hitting multi-year if not multi-decade highs, before
peaking in 2008 Q4 if commodity prices stabilize and wage-price spirals
don?t develop.
In the majority of South-East Asian countries,
we continue to believe that the policy authorities have fallen well
behind the curve (as indicated by negative real interest rates and
generally strong credit growth) and will have to catch up, largely via
higher interest rates. We doubt any Central Bank will be cutting rates
this year, with the vast majority having to tighten monetary
conditions.
Is emerging Asia in a position to make up
for the falling consumption demand in the US and other developed
countries as previously believed, now that the purchasing power in
these economies is getting eroded significantly?
The
impact of persistently high inflation on the economic growth
performance of the emerging Asian economies is extremely complicated
and we suspect that the net impact depends largely on the extent to
which the rise in inflation is deemed to be permanent.
If it
is generally considered to be a temporary shock, then the most likely
outcome is that real personal incomes see a short-lived squeeze which
may have a small depressing impact on consumption, while companies will
probably tolerate a temporary hit to their profit margins, assuming we
are talking about a mainly cost-induced rise in price pressures. A more
permanent shock would have more dramatic effects, forcing Central Banks
into aggressive action to control inflationary expectations for
expectations for example.
Is the worst yet to come for food price led inflation? Food
inflation is not just a function of supply-side developments but
domestic demand as well. Two factors could be important here. First,
higher demand for food itself, which directly pushes up prices. And
second, greater confidence amongst retailers that they can make higher
prices stick. Both food and energy also have important implications for
core inflation in these countries.
Agricultural productivity may
need to rise and rise significantly if the demand/supply balance in the
production of food is to return to a level associated with price
stability. The trouble is, however, there is little to suggest that
agricultural productivity in the developing world is increasing or that
enough is being invested to make sure that it will rise in the future.
India is a good example of this.
This is not to say that food
price inflation will continue to run at its current, exceptionally high
rate. There has been, and almost certainly will remain, a regular cycle
in global food prices. In fact, we wouldn?t be at all surprised to see
food commodity price inflation peak and come down in the not too
distant future.
At the same time, however, there is a sizeable
risk that over the long term the rises in food commodity price
inflation will become sharper and the downturns less pronounced (as has
arguably already been the case over the last five years).
Has
economic decoupling become real with the central banks in the Asian
region pressing on the price stability and the developed nations
focusing on the economic growth?
While we remain far
from convinced that the US/developed world slowdown would drive GDP
growth below trend in Asia with food price pressures structurally
stronger now and labour markets generally tight, the danger of
wage-price spirals developing are high. If this happens and Central
Banks react aggressively then, with a lag, economic growth in the
region could take a sizeable hit. Ironically it may be that at exactly
the same time as the US is beginning to recover, South-East Asia is
slowing rapidly, effectively extending the period of economic
de-coupling.
