What have you made of the Reserve Bank of India hiking their repo and the reverse repo at this point in time?
That was as expected. SG Economics was looking for 25 basis points. We thought that there was the potential for 50 basis point hike, but we do expect three more in the coming 2 to 3 quarters.
The RBI has actually come out and said that there are potential risks to growth for the Indian economy going forward. How would you read into that comment from the central bank?
When you are in a tightening cycle, the actual conclusion of tightening is to slow things down so that you can bring inflation into control. So the fact that they are tightening and bringing real interest rates into a more positive area means that the cost of borrowing goes up and actual investment in economic activity should go down. It is not just onto India, the rest of Asia is tightening as well and we expect Asia as a whole there to be slowing down over the coming two quarters.
The global scenario at this point in time purely in terms of equities looks a little sticky and corporate earnings as well. Do you think India is in queue for an earnings downgrade in the times to come? What is your thought?
I would say yes, just because when I look across the region where the analysts have been putting their best and baking their numbers into the forecast, most analysts still have forecasts at or near their cyclical highs. Upgrades have been taking place straight through last year and the fact that you have the central bank saying things are going to slow down means by consequence, some earnings should be hit on that front. Just on the top of my head, I am going to say there is at least 10% downside to earnings if not more and that is yet to be priced in even though the market has corrected a little bit from its all time highs.
Given the crisis that we are seeing in Japan, how do you believe FIIs are going to allocate funds or reallocate funds? Do you believe that money that was in Japan is going to find its way out of that market and into emerging markets in the Asia region or do you believe that money is actually going to go back to home markets?
This is where things get interesting because I believe that some of that money was already getting reallocated from developed markets back to emerging markets before this crisis even took place. If you look at India and emerging markets, they had underperformed straight through from October up until just 3 weeks ago and we have seen pretty steady recovery and part of that was valuation, part of it was an adjustment in the yield curve in the US and some money just going back to developed markets and seeing more value.
We are going to see money going back into India and also China for that matter as this transpires. There is no question that there has been quite a lot of money that has already departed Japan over the last few days.
India in particular, the equities have corrected nearly about almost odd 11% to 15% year to date. How much more of a downside in the near term are you projecting for India given the kind of global landscape that we are sitting in and domestically internally as well, there are concerns about inflation, credit growth...
The fact that you are actually seeing some of this reallocation of funds towards emerging markets is already mitigating some of the downside. You have already seen over the last week or 2, India has not participated in some of the downside that some other markets have seen.
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