Markets will turnaround if RBI starts cutting rates: Robert Prior-Wandesforde, Credit Suisse

ET Now: With respect to what we are seeing for the Indian markets, there is a lot of trepidation as to where we will be breaking this 4700 levels on the downside. Are you foreseeing that happening and what is the kind of strength that you are mapping for the Indian markets particularly?

Robert Prior-Wandesforde: There is a combination of negative factors here to play. One is the global phenomenon, that is the Eurozone, how it might impact the markets across the world and economic growth across the world. And also domestic factors in India, in particular. We will see the markets and analysts waking up to the fact that we are going to see a downside, much weaker Indian growth. So, it is a pretty nasty combination of both external and internal drivers here. And as far as future is concerned, Eurozone, it is very hard to be optimistic here at this stage. The problems are going to run around. Domestically however I suspect things might get better in India certainly by early next year. I would think inflation will come down and that will set the stage for rate reductions which in turn should help improve the matter somewhat.

Robert Prior-Wandesforde: Clearly that is the possibility. It would become a central view, if inflation does not subside in the way that the RBI expects it to slide or indeed we expected to fall, our own forecast is actually for inflation to if anything coming below the RBI’s 7% in fiscal year number on the back of lower commodity prices. If we instead get a combination of so high and sticky inflation and growth slowdown, clearly there will be lots and lots of talk about stagflation, may be little extreme, but it would do the market clearly no favour whatsoever. We are highly dependent on inflation side to come down and that leading to a series of rate cuts for the market to turn around. That is my central view as I say.

ET Now: It would be interesting also to get in your view on the currency space particularly for the rupee which is only down and out. It is at that 51 level and now traders fearing that it can even breach a level of 52.2 against the US dollar. That is the lowest level it has ever been. What is your view on the rupee?

Robert Prior-Wandesforde: Yes, again it is hard to be optimistic in the short term. The key area that the RBI is largely absent on the market is it is still not showing any intention to intervene here despite what has been pretty sharp depreciation in the currency and that leads the rupee in a very different situation for a majority of Asian currencies where central banks are intervening to defend a particular level. So, the rupee is an easy fell against that background particularly when you bear in mind of course the twin deficit problem that India has. As long as we do not see the RBI intervening, the currency is going to soften and soften potentially quite a lot. My guess is that the RBI will come in at some point to a reasonable extent and try and persuade the market. I would be surprised if we did not see that intervention at some point in the fairly near future actually.

ET Now: US is also running a very high fiscal deficit, in fact their fiscal deficit is nearing an all time high. So Indian rupee is suffering because India is running a high fiscal deficit that is logical but then what explains this strength in dollar because US is also running a high fiscal deficit?

Robert Prior-Wandesforde: What we know is that when investors do not want to take risk, the safe haven of choice partly because of this so liquid is the US dollar along with perhaps the Japanese yen and the Swiss currency. As far as the Swiss currency is concerned, we know what the Swiss National Bank has done there. Also in the yen, there is intervention of risk as well. So that really only leaves the US dollar as a sort of safe haven currency of choice because the Federal Reserve is probably happy right now for the US dollar to appreciate.

Robert Prior-Wandesforde: Yes, I can. It is certainly not all doom and gloom. My guess is that certainly by the end of the fiscal year, we will be looking at inflation coming down. We will have seen more in the way of analysts and earnings downgrades and growth downgrades. We will be on the brink of interest rate cuts and that combination will be a fairly favourable on not just for the Indian equity market, but also I suspect for the currency. It was little ironic given we are talking interest rate cuts. But often the rupee is driven by equity market and related flows. If interest rate cuts board well, actually should do good to the equity market.
The only other point I will make here is that for western investors, there is still a lot of pent up demand for Indian asset. It is meaning to me that foreign inflows, FII inflows into India this year have been roughly zero despite what has happened there. Almost everything that could have gone wrong has gone wrong for India and yet there has not been a significant account flow of foreign money. What happens when we get a little bit of good news?