Investors concerned over scope for further fall of rupee: Adrian Foster

Last Updated: Thu, May 17, 2012 20:01 hrs

The rupee has seen a slide against the greenback. In this background, foreign direct investments will become more important than portfolio inflows, says Adrian Foster, head of financial markets research, Asia Pacific, Rabobank International, in a conversation with Puneet Wadhwa. Edited excerpts:

Do you think the Indian markets will melt this summer, given the macroeconomic headwinds? Where do you see the Sensex and the Nifty by FY13-end?
The global trends will remain important drivers for the Indian equity markets. I doubt the risks, as currently widely discussed, will pan out for markets across the globe. I expect markets to close the year higher than current levels. This is also true for India.

What is your interpretation of the developments in Europe, especially France and Greece?
Asia-Pac markets, including India, are showing quite a high correlation with trends in major markets, and Europe is the main driver. In France, I think Hollande could well turn out to be more responsible than perhaps some are thinking. Recent events in the Netherlands (when bond yields shot higher when the government failed to pass austerity measures) serve as a clear warning that an irresponsible policy approach will backfire very quickly.

There are parliamentary elections in June (10 and 17) and France will remain in electioneering mode till then. It is unlikely that there will be any policies announced prior to these elections. As regards Greece, politicians are being quite irresponsible in holding out the hope that they can relax austerity. Greece still needs foreign capital inflow to fund its budget. It seems that new elections will need to be held.

How are the foreign institutional investors positioning themselves with respect to India, given the rising cost of subsidies, widening current account deficit and the rupee-dollar equation?
Investors are concerned over the rupee and scope for further depreciation. Increasingly, the foreign direct investment will become more important than portfolio capital and this requires a loosening of restrictions on foreigners investing directly in India.

How would things shape up for the global economy given the recent data and statements from the central banks across the globe?
The global and Indian central banks are rightly concerned about risks and the upshot is that they will hold policy uber-easy for quite a while to come. I feel, the Reserve Bank of India will continue to slash rates.

Rating agencies like Standard & Poor’s and Moody’s have been quite active lately with the revision in credit ratings/ outlook. Your reaction to the changes they made?
I think they have been behind the market with most of their ratings downgrades in recent months. Given all these, the markets haven’t reacted much.

Do the valuations and prospects of other emerging markets appear more attractive than India?
Global trends/factors have been an important driver of regional and Indian markets for quite a while now and are likely to remain the single- largest driver of regional and Indian markets this year.

What is your outlook for crude oil, given the latest demand-supply, inventory data from the US and the geopolitical situation?
Geopolitical risks will likely persist for some more time. It is hard to see how the myriad challenges confronting many producing areas will disappear and this seems to be a part of the new normal for this industry. Add in the ongoing global demand growth — we’re not particularly bullish on global growth prospects this year and next but do not expect the many downside risks currently being widely discussed to pan out – and prices are likely to remain elevated. US demand growth will likely continue albeit at rates slower than historical norms.

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