Rupee could rise 8-9 percent by the end of the year: Jerome Booth, Ashmore Group

India’s response to foreign capital is “frustrating”, said Jerome Booth, global research head of Ashmore Group, a London-based investment manager with over $1 billion investments in India. In an interview with ET, Booth said the rupee could appreciate as much as 9% this year because the dollar is overvalued. Edited excerpts:

India is mulling over a proposal to levy short-term gains tax on overseas investors trading through tax havens. Has this altered your view on India?

Well, I think the foreign investors’ view of India is one of a little frustration. India needs to brave much more foreign capital inflow, and to try and use it to address its infrastructure and capital shortfalls so as to create much higher noninflationary growth. And there’s a huge deficit in infrastructure in India. So, there needs to be more willingness to open up to foreign investments of all types — debt and equity and direct investment. I think that’s the context here, clearly with the foreign direct investment being encouraged, then not quite so much and then encouraged again — like the retail proposals — it’s moving in the right direction, but it could be much faster. The markets, externally, are really optimistic, and my general first reaction is foreign investment should be more welcome in India.
What is your view on Indian stocks?

Foreign investors in equities are being a little wary of India because of the policy uncertainty, given that the P/E ratio is cheap but not as cheap as other emerging markets. I am not anticipating a wave of foreign money coming in at the moment.

What will be the key catalyst for the Indian markets?

The chief catalyst is interest rates, and the recent cut was largely expected, but we will see where the trajectory takes us. A lot of the inflationary pressure is coming from the import of oil, etc, and the RBI actually is doing a very good job. The problems they face are obviously coming from fiscal authorities. But the political elite in India is still, to an extent, obsessed by current account deficit and the central bank is behaving as if it doesn’t have reserves. In reality, it does have huge reserves and should be able to be less worried about things like deficit. It should be using its reserves much more chiefly to soothe foreign exchange movements, but also certainly to help exchange rates go up as a means to combat inflation.

I am also interested in what happens on fiscal policy. Subsidies clearly are a major issue. Another overwhelming issue in fiscal policy is that India is not a massively taxed country at all and the budget is not excessive, but it is distorted because a lot of people or companies really don’t pay tax. There just needs to be much, much better uniformity in tax collection and the burden of tax would be much less distortionary. I think there are huge issues with the structure of fiscal policy, which is overwhelmingly important for markets in the longer term including the equity markets.

What is your outlook on the Indian rupee? Do you believe it is undervalued?

The rupee should rise with other Asian currencies, which would probably rise 8-9% between now and the end of the year. The Indian or Asian currencies are not the issue here, the issue here is the dollar. The dollar is one of the riskiest and overvalued currencies in the world, together with the euro and sterling — the countries with big macroeconomic problems and countries which will continue to have big macroeconomic problems and imbalances for another several years. There are a lot of people who want to ignore the continuous slow or moderate growth in the United States, the continued need for deleveraging particularly in the housing market, and the fact that the US has had no fiscal adjustments so far.

These issues are all periodically being denied by the markets. The markets, right now, are still a little bit overoptimistic about the dollar. The dollar, right now, is a little bit too high, and so, I would expect the rupee, together with other Asian currencies, to at least revert to what it was last year, which means the best part of a 10% appreciation. In India, the reluctance to let the currency appreciate is driven by the fear of current account deficits, and my reaction to that is — you shouldn’t worry about that. You should worry much more about the supply side and getting infrastructure investment into the country than current account deficits. India is behaving as though it doesn’t have huge reserves while it does have huge reserves. You need more self confidence, in other words, to let the currency go up.

You talked about increased infrastructure being key to India’s growth. Could you elaborate?

The government in its 5-year plan has about a half-a-trillion dollars worth of plans for infrastructure and as in the previous plans, reality tends to lag the plans. The plan is not ambitious in any way, but the way to do it rather than plan it centrally is to open it up to private investment, including foreign capital. The huge potential of entrepreneurial ability in India is being stymied by lack of basic infrastructure and the result is inflationary pressures, which then result obviously in bouts of higher interest rates and inverse stimulus.

That, I think, is one of the major structural problems in the Indian economy. If we can see effective control of inflation — and of course, Indian inflation has been higher than much of Asia and earlier, then, I think we could do a lot of that without high interest rates, if we just had more infrastructure. The question is that of getting the structural reforms correct to allow sustainable growth. India is capable of higher than 8% growth without inflation, but not without major investment in infrastructure.