Rupee will be affected much less than most other currencies: Manoj Rane, BNP Paribas

Mythili Bhusnurmath, Consulting Editor, ET NOW, and Manoj Rane, MD & Head - Global Markets & Treasury, BNP Paribas, speak on macroeconomy, Donald Trump and the rupee. Edited excerpts:

It is an important day today. Donald Trump is going to be the next President of the United States but he has not quite stepped back on the rhetoric that he has created and his brand of politics is leading to a lot of uncertainty so today onwards all of that uncertainty unfolds and reality takes over?

Mythili Bhusnurmath: He has not retracted from anyway of his pretty wild statements in the run up to the presidency and that the unfortunate part for the world as a whole particularly because for countries like India and China were have been the biggest gainers from globalisation not that the US has not gained. The US has also gain enormously but unfortunately Trump does not see the gains, he only seems and think in terms of jobs that have been transported across to other countries so I think the whole world is a little nervous and you are seeing that kind of nervousness reflected in the currency markets and the bond markets which is why we have seen the dollar index weakening a little bit, we have seen statements from Janet Yellen which seems to suggest that the Fed is perhaps not very sure really in its own mind what it needs to do next. But let me just draw in Manoj over here and ask him what is your assessment or what will we see in the days of the Trump presidency and in the first few days are we going to see any dramatic statements or will Trump mature as we grows into the job.

Manoj Rane: Since I am not a political analyst I think it is your area of expertise, but I can say for one thing for sure is that markets are concerned about two things - one of course is the currency because Trump government is expected to be more supportive of businesses and probably more easing out stuff so that will in turn lead to US dollar strength, as well as probably likely higher rates going forward. So the market is factoring in a few interest rate hikes.


Different analyst believe to different extents but I think that more or less there is a consensus that you are in for a stronger dollar versus most of the other currencies in the world and also the fact that you will see higher dollar interest rates. Now what that means for us specifically in India is that we have to be prepared for some investor type outflows. We have seen that happen over the last couple of months of course attributed a bit to demonetisation but also substantially to dollar strength and emerging markets weakness so that is one thing we got to be careful about. What does that do to a currency I am not too sure our currency that is the INR is going to be substantially affected possibly much less than most of the currencies which depend a lot on the US more specifically also the fact that our current account has been in reasonable shape over the last year and a half or two so that will play out positively for us.

So I do not expect the currency to take much more beating and as it is quite evident over the last two-three weeks like your colleague was saying earlier that how markets are flat so just anecdotally equity markets are flat, bond yields have been flat in fact not just flat for the day but the curve itself is quite flat and so have fx markets over the last month or two anticipation or trepidation or otherwise of the Trump Presidency.

Mythili Bhusnurmath: Do you think the good times are over for India in the sense that we are going to see oil prices go up. We are going to see the dollar strengthen, we are also going to see interest rates go up in the US which means there will be capital outflows from India but will this be compensated to some extent by the weakening of the rupee which should help our exports at a time when protection tendencies are increasing all over the world and a more competitive rupee should help us?

Manoj Rane: It would but I am not too sure that you might see a substantial or significant currency depreciation couple of the factors you have mentioned for one; oil prices going up whether they are going to go up substantially from here the jury is out. In fact the view is strongly that over $55 a barrel the Shale oil story begins again and we have seen that happen over the last month or so. So I think oil analyst everywhere do not expect substantial increase from here as far as oil prices are concerned so that in fact helps us because that kind of plays out positively for our current account deficit story which has been fairly manageable.

As far as outflows are concerned, the story of outflows has largely been arbitrage type outflows, investors who are typically affected significantly by interest rates or rely a lot on their cost of funding. This tends to be typically the FII, FPI type and particularly in debt you have not seen to that extent even in 2013 large equity outflows but you did see large debt outflows again that has played out to a certain extent of course will be vulnerable to that because if interest rates in the US do rise substantially you will see some element of arbitrage money going out.

Having said that that is not the genuine capital investment story right so as far as FDI is concerned, as far as investment in projects are concerned those will rely a lot on how growth plays out the story on growth in India is not as bad as was expected post demonetisation and also investors globally as well as Rallis have all ascribed to a short term kind of may be one or two quarters kind of slowdown and you do not see really medium to long term investors were committed to India exit due to that, so my view is that Trump presidency may not be that negative for India as far as these markets are concerned but possibly to sectors like for instance tech has been concerned and possibly rightfully so. Again I am not too sure of how the dynamics will pan out ultimately whether you will have a better behaved overall climate for visas etc.

Given the fact that either ways money coming in via P-Notes over the course of the last three-four years has actually reduced, one would say okay I am not really surprised by this decision because markets have matured the way foreign investors invest in India, the options of that have increased so what do you really take away from this decision, I think 20% to 30% of the flows right now are directed through P Notes so yes for now it is a sign of stability that the P Note instrument continues and a call on that would be taken later.

Mythili Bhusnurmath: Well yes in a way it is good that SEBI has come out to remove the uncertainty because there was this uncertainty, but I have always been against P-Notes for the simple reason that what SEBI ought to do and what it has been doing is making the entire process of registration very simple because P Notes are just a facade in the sense that we do not know who the ultimate beneficiary is. So any FII is free to invest in India. There are restrictions. So if FIIs wish to ride on the India growth story or the India debt story whatever it is the arbitrage story, there is no reason why they should not come in and we know who the ultimate beneficiary is.

For a government like the Modi government which has put so much price at store or the entire issue of transparency we have renegotiated the treaty with Mauritius, with Singapore the entire focus is that we want to keep our markets open but please come in openly, do not come in through back door. So P-Notes essentially were an opportunity to come in through the backdoor which we do not really need to rely on unlike in the past when we were so critically dependent on the P-Note instrument, today that dependence has come down drastically so while it is good that SEBI has removed the uncertainty, I think we need to move towards the system, a transparent system why anybody comes in very openly through registration and the entire process of registration itself is made so simple that nobody needs to resort to P-Notes.

Mythili Bhusnurmath: Are the P-Notes really are unnecessary distraction in the India of today?

Manoj Rane: Once again, not really an expert on this topic, but my limited view is that the ills attributed to P-Notes largely round tripping as well as promoters money coming back or going into another entities in my mind had already been dealt with by legislation or by SEBI circulars. One of them being that P Notes can only be sold to regulated entities. So in my mind, after that we had seen a much better behaviour of investors and issuances of P-Notes. In fact, a couple institutions had got penalised as well due to non-compliance with this regulation.

My sense was that may be there is indeed a category of investors who might find it easier to participate by way of P-Notes like for instance high net worth individuals, wealth management guys and what about non-Indians. Unfortunately there is a whole lot of investor class which were not really be Indians or NRIs or who are so tuned into the Indian markets who are happy to register and come and invest. I think P-Notes largely kind of addressed that category of investors. But as I said once again not on an expert on that but my limited view is that whatever was to be done in terms of regulations, P-Notes had already been done. So maybe it might be too strict to kind of completely ban them.