We will continue to see the tailwind behind us for some time: K Harihar, First Rand Bank

In a chat with Mythili Bhusnurmath, Consulting Editor, and K Harihar, First Rand Bank discuss macro cues and how we must use the tailwind to make sure that various parts of our economy are structurally sorted out. Edited excerpts

ET Now: Before any of the other macro data point that you may want to touch upon and events that you may want to highlight, let us talk about how this process would play out and what would be on the government’s mind in terms of finding the right candidate to lead the market regulator.

Mythili Bhusnurmath: It is interesting that you raised that issue because while in the case of the Reserve Bank of India’s governor, we have seen excessive sound and fury, over the choice of Rajan’s successor but as far as the Sebi chief is concerned, it has always been a much more low key operation. We do not see the kind of sound and fury that accompanied the RBI governor’s appointment.

Likewise, in so far what we have seen except for Mr Bajpai who came from the insurance sector, all the other SEBI chiefs have essentially been bureaucrats. So I do hope the government will change that because I am not sure a bureaucrat is the best person for the job. Of course, so far they have delivered but in the past the challenges before SEBI were much less because RBI was the numero uno regulator. Now with FDC, etc, being set up, I think the attempt really is to bring up the SEBI regulator more or less on par if marginally below the RBI regulator and clearly with the importance of stock markets increasing as more and more people invest in the stock markets and more and more companies turn to the stock market to raise capital, I think it is important that you choose the right kind of person with the right mix of industry knowledge and integrity.

If you go by what the government selection in the MPC members has been, clearly the government is going by competence. It is also going by youth because they opted to go for relatively young people as compared to the traditions in the past where you thought that age was means greater wisdom. So, I do hope the government chooses the right person who has some knowledge of the industry.

In fact, not just some knowledge, good knowledge of how the industry functions is necessary., The challenges coming in before the regulator are always going to be very tough. In fact, they always say the policeman is always chasing the thief. Not that market players are necessarily thieves, but the regulator always has to be ahead of the market players and that is always challenging. So I think you need to have a person who is competent, whose integrity is above board, who knows how the market functions. So far, the government has chosen to go for competence and market knowledge, domain knowledge and I do hope that the choice of the Sebi chairman also this will be reflected.

Mythili Bhusnurmath: How are you seeing the government’s appointment of the external members of the MPC? Are you enthused by the kind of names that you are seeing or do you wish that it should be a little bit more broad based? We have got excellent economists but being an economist myself, I am a little wary of a committee which consists entirely of economists because in a country like India where the central bank has so many diverse responsibilities, you need somebody who looks macroeconomic stability, financial stability and who has some awareness of how bond market functions, how credit market functions and these are not directly related to inflation targeting. One should have a very important bearing into what goes into inflation targeting. Would you agree with me on that?

K Harihar: Overall, when we saw the names coming in, the bond market is pretty happy. What are the bond markets typically looking for? They look for certainty in terms of what MPC is supposed to do. So while we have a broad number that has been charted on in terms of the inflation number that the Reserve Bank of India should target, first of all, there is going to be MPC institutionalised as a whole process. So it is not going to be 1% solo call though there will be kind of bigger influence coming in from the governor but it is going to be a process where people were casting vote for the governor coming in.

Secondly, it is going to be data driven kind of decision process and the kind of choice that has come up with a heavy slant on their statistical kind of excellence, is also proving that it is going to be high data driven kind of analysis and that too a certain extent for the bond market point of view gives a lot of certainty.

Otherwise, if you have a decision where inflation is going up and despite that there is a vote playing being placed on growth and you have interest rate cut, that sort of confuses a bond market. So from a bond market perspective, institutionalising with MPC coming is a big plus. On the fact of it, the kind of committee members and that the profile that we have which is a deep understanding of Indian statistical kind of situation and a lot of domain knowledge, I think that is going to add a lot of value to the committee.

At the same time, you have very experienced RBI people also sitting in the committee and the very fact that the bond market seems to have kind of edged down, of course, this is not the only reason you had the FOMC happening, you have the Bank of Japan event happening so when you confluence all of these, I think it augurs very well for the bond market going forward and as I have said again we like certainty whether the interest rates go up or not, it has to be data driven and you and I can figure out the data on a prospective basis with the actual data.

ET Now: Aside from choosing the SEBI chairman and some of the key macro data points, what do you think would be a key determinant in terms of monetary policy framework going forward over the next three to four months?

Mythili Bhusnurmath: Well, yes when I was hearing Hari I was thinking where he said how the bond markets are very happy with the names that have come out from the government about the MPC and that really brought to mind what one of the former US Treasury secretaries had said that if he was born again, he would want to come back as a bond market because they are so powerful. So the bond markets clearly have a big say in what is happening.

Mythili Bhusnurmath: But I wanted to ask you, if you look at the macroeconomic fundamentals at the moment, do you think this government is extraordinarily lucky because we are seeing interest rates are so low on government securities, cheaper money for the government, interest costs have come down, the rupee is stable! Of course, I do not think the rupee being stable is a good idea, but as far as inflation is concerned, yes it certainly helps, it also helps in giving faith outside investors. As far as India is concerned, we have seen the kind of FDI flows coming, we are seeing prices come down or stablise. Oil prices again are fairly stable, not going up...so do you think this government is really a lucky government and that is what matters at the end of day, luck?

K Harihar: Luck matters a lot. In our markets, in treasury markets we always keep saying that the competence is a given but the successful trader is one who also has luck so clearly all the factors that you have mentioned, the fact that the US economy and various other parts of the world including Euro zone, Japan and China are in a slowdown mode, the fact that commodity prices have collapsed, the fact that that plays into us in terms of lower trade deficit and we saw the current account deficit number where all of us are comfortably and confidently saying we will be at 1.25%, we are now clicking at 0.25% and consistent balance of payment surplus, reserves of $375 billion, so all of this has partly been our rectifying our house and getting the fiscal deficit in shape and the trade numbers in shape.

Clearly, there has been a huge tailwind in the form of the lower commodity prices and more importantly the fact that for various other reasons the US has postponed the rate hike and now they have marked down the intensity of the rate hikes so that gives you the sense that dollar inflows are going to continue at least into the equity market. Again, the Euro zone looks soft, Japan yesterday they could have tightened the policy but they kept it where it was.

I think we have been a beneficiary of all of this and more importantly when you extrapolate this into the future I think we can continue to see the tailwind behind us for some time and that is where I think we should be pretty confident of the fact that when the interest rate differentials are so large, when it actually costs you money to place money on deposit in various parts of Euro zone, when you see a Masala bond coming up. Masala bond is a classic example where people thought it will be very tough to sell. Now, you not only have the HDFCs and other companies of India selling Masala bonds but you actually have a foreign entity issuing a INR bond, a Canadian pension fund and in turn reinvesting it in our Indian bonds.

So I think we are beneficiaries of this tailwind and we have to be happy about it. We are very lucky. More importantly, this is not a passing kind of tailwind. It seems to be there with us and if we use this very properly to make sure that various parts of our economy are structurally sorted out whether it is the GST, whether it is fiscal numbers, DBT etc and we seem to be doing all of that. I think even when the tailwind disappears we will be in a much stronger position that we were before we entered it.