India’s trade deficit narrowed to $17.4 billion in August from a 5-year high of $18.02 billion in July, helped by a pickup in exports after a fall in the rupee, said Rajiv Ranjan Singh, CEO of Karvy Stock Broking, in an interview with Sangeetha G. We are witnessing currency depreciation in most emerging economies, out of which a part of can be attributed to the ongoing trade tussle, he said. Excerpts:
What has been the market reaction to imposition of fresh tariffs by the US on China?
China and the US are engaged in a full-scale trade war. Both sides are lobbing threats of new tariffs at each other are also implementing them. While it remains uncertain as to how this US-China retaliatory tariffs game will play out, there is little doubt that it will impact global growth and investments across borders. The integration of supply chains both domestically and globally has meant that any trade measure implemented on a single country or sector will extend beyond the direct impact on demand. Impact on global growth can be measured by the inter-dependencies among different sectors and to what extent the output of one sector becomes an input in another sector. We have seen most countries changing dumping policies, which is yet another trigger from trade war.
What could be the outcome of new tariffs? How will they impact markets and currencies?
Tariffs disrupt the financial markets, increase input costs, decrease the profit margins of businesses, thereby resulting in rise in prices for consumers followed by inflation, hike in interest rates and economic slowdown. We need to look for how developing or exporting countries will react and whether they are able to benefit from a greater integration with China as existing trade flows are diverted to new markets. China has removed import duties on anti-cancer drugs from India and also agreed to help in predicting river flows between India and China during floods.
Another important point is if Chinese manufacturers or exporters seek to shift production to other countries that are affected by tariffs, it can lead to a huge impact on trade deficit and currency movements. China has always been a preferred destination for offshore manufacturing, especially by electronics, clothing and footwear firms of the US. These firms will have to reorganise supply chains due to tariffs and look for alternatives other than China.
Our trade deficit narrowed to $17.4 billion in August from a 5-year high of $18.02 billion, hit in July, helped by a pickup in exports after a fall in the rupee. We are witnessing currency depreciation in most emerging economies, out of which a part of can be attributed to the ongoing trade tussle. Over the last few days, we have seen the dollar cooling with the risk of re-escalation of trade war. China has stated they would not weaken the yuan.
How will the amalgamation of Bank of Baroda, Vijaya Bank and Dena Bank work?
In a logical step of restructuring and strengthening the banking system, the government has announced merger of 3 banks, which could create the third largest bank with a business of Rs 15 trillion. Increase in rationalisation of branches, re-deployment of manpower and cost reduction may be seen as major advantages. The combined entity will have a good capital adequacy ratio of over 12 per cent with Tier I standing at 9.25 per cent. But net NPAs shall be still higher than 5 per cent.
With a strong credit culture Vijaya Bank is one of the best performing banks. Dena Bank has good MSME portfolio and strong CASA. These shall add to synergy of Bank of Baroda (BoB), which is technologically sound.
What could be the impact of such mergers?
27 years ago, a committee headed by M Narasimham, 13th RBI governor, had proposed trimming the number of government-owned banks, which could be positioned strongly as global banks were few and without a strong national presence. It was also aimed at reducing infusion of capital by the government and raising capital adequacy ratio and tier 1 capital. Most PSBs are competing for same customer and are giving lower return on capital employed.
In the long-term, these steps shall strengthen the banking and financial system, which shall boost credit growth and economy.
Some rating agencies have downgraded Indian market saying its run is over amid elevated valuation, possible slowdown & next polls. What’s your take?
Historically, Indian equities have traded at a premium to Asian peers because of the nation’s potential for faster economic growth. In the recent scenario, we have faced tests from higher oil prices and a tumbling rupee. If the oil goes above $80-82 and the rupee declines towards 73-75, it may lead to further worries for the economy. But for the time horizon of the next 2-5 years, we maintain our bullish stance on the market and expect it to see a roller coaster ride in the short-run as we approach the 2019 elections. Any sharp declines in the domestic market can be used to construct long-term portfolio, as we still seem to remain in the sweetest spot from a growth perspective.
How will it impact the Indian market and the FII flow?
The market is likely to remain extremely volatile in the short-run, given the recent up-move in the crude prices and the depreciating rupee. Also, upcoming state polls followed by the 2019 Lok Sabha elections may create further volatility among the broader market. The FII flows will mainly depend upon the rupee and the global risk environment. But India has seen relatively lower FII outflows of Rs 6,500 crore in September against other EM/Asian peers. On the domestic front, liquidity from MFs has been strong over the past few years and touched record highs, thereby extending help against any FII outflows.
How will inflation, widening CAD and oil prices add fuel to this fire?
India’s current account deficit (CAD) has widened to $15.8 billion, which is 2.4 per cent of the gross domestic product. Recently, the government decided to curb non-essential imports and increase exports, also announcing five-point plan to increase dollar inflows to fund and reduce CAD. Moving forward, the depreciating rupee is not likely to boost exports in the short-run due to other structural factors like trade war, which is dragging India’s export prospects. The current situation of high oil price is likely to further damage the investor sentiment.
As we are at the fag end of Q2, what is your estimate on the performance of key sectors?
In the next couple of months, we expect sectors like information technology, pharmaceuticals and export-oriented companies to do well amid the weakening rupee. Even OMC’s are likely to deliver better numbers because of their inventory gains from rising crude prices, while PSBs and financials are likely to deliver poor numbers amid rising bond yields and mark-to-market losses in their bond portfolios.