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Oil prices boosted rupee: JPMorgan Chase Bank

November 10, 2006 15:50 IST

There were some interesting changes that happened in the United States of America a couple of days back. Rajeev Malik of JPMorgan Chase Bank discusses the repercussions of the recent developments in the US on the Indian economy.

He says that the India-US Nuclear deal could be delayed, but would go through. He also says that foreign trade and foreign policy would see some changes.

Moving on, he says that oil prices and resilience in terms of foreign flows have given a higher-than-expected boost to the rupee.

As far as US growth is concerned, he says that the first half of next year is expected to be better than the second half of this year.

Excerpts from CNBC - TV18's exclusive interview with Rajeev Malik:

How have you read the political changes? Are there any ramifications at all that you see on global markets, whether it is money or equity?

Straight off the bat, it does show that a miracle can happen. Democrats have both houses of Congress now, after a period of 12 years. Very broadly, the three key areas in which any kind of political change would have an impact would obviously be in terms of the fiscal position as far as the US is concerned.

What is happening as far as foreign trade relations are concerned and separately foreign policy as such, is that for all practical purposes, all three issues get underscored by the health of the US economy.

So to the extent that one is bearish in terms of how the US economy is going to fare over the next year or two, one could spend quite a few different angles in terms of whether or not democratic Congress is likely to be more protectionist, be more nationalistic, inward oriented, try and go for higher spending taxes etc.

Atleast on the fiscal side it is fairly clear that any kind of tax increase or an increase in spending that is not necessarily palatable, would get vetoed by Bush. Since we have become somewhat more subtle on foreign trade issues and foreign policy, we have already seen Rumsfeld going in and resigning, I think the whole issue about how Iraq has been handled is getting noticed.

It is most likely that some changes would come about to be in sync with more of what the American public has been talking about. But therein, I think the solution is unlikely to be an early withdrawal of US troops out of Iraq. It is more likely to be closer scrutiny in terms of what the executives actions and decisions are on that particular issue.

China remains topical and continues to be so. But interestingly, just dealing with China, US has increasingly adopted more of a bipartisan approach. So here again, unless the US economy does substantially worse than what people think, I am not sure it has foregone conclusion that you are likely to see a substantial increase in protectionism or China bashing necessarily coming back.

Any ramifications for India as such because there has been some rumblings about the nuke deal etc. but do we stand to loose or gain in anyway you think?

There are two key issues. One, obviously as you mentioned, is the India US nuclear deal which, to the extent of some of the concerns that were raised earlier, are addressed within the lame duck session, would see it through.

Otherwise, the whole process would have to be started again when the Congress meets next year, and that obviously means a delay. It is not clear which way it will go. I would still think to the extent that if some of the amendments etc are acceptable and put into change, we could still see it go through.

Whether it happens this year or next year is pretty much up in the air. There is enough on the agenda as far as the lame duck session is concerned. Much as we hear the rhetoric that India US deal is very much high on the agenda, I am not sure if it necessarily goes through just this year.

The second aspect, which always is quite topical, is about jobs creation in terms of visas and service sector jobs getting relocated overseas. Here again, the political rhetoric in the US always is stepped up when domestic conditions tend to be much worse.

While the US is going through a soft patch right now, we do reckon that by early next year there should be more convincing signs of things beginning to improve. First half of next year, as far as US growth is concerned, is likely to be better than the second half of this year.

You made the point that the policy might be more inward looking from here. Does that make any difference to an emerging market in terms of flows or even interest?

I don't think it is a forgone conclusion that it would be totally inward looking. I think the risk is that if the US doesn't do well, then politically it is the easiest thing to become a lot more inward looking, and that is quite a possibility.

I think purely in terms of how the dollar reacts is a one-transmission mechanism. So far it is still early. Against the yen we will probably see a move closer to 120 etc.

Specifically on India, I think the rupee is already benefiting from what is a solid growth story and continues to be so despite some signs of excesses and more importantly flows, which are doing well. Finally with oil prices having come off, I think it is literally a bull story all the way for the rupee.

Have you changed your year-end target on the rupee given the way it has muscled up although you haven't been a big fan of it?

I think we have definitely been caught short on that front. I think oil prices coming off quite substantially and then staying low, has been one important factor. The other obviously being just a resilience in terms of foreign inflows.

We still would flag the risk in terms of any kind of corrections specially in terms of flows or a global event that impacts those flows. Lets say a shift in US interest rate outlook does leave India vulnerable, simply because the amount of money that's flowed in the kind of valuation it offers irrespective of how strong the earnings and growth momentum is.

But at the end of the day, one has to admit that these flows and the lower oil prices are having a significantly greater boost to the strength of the rupee than we had anticipated. As of now, it doesn't seem that either of them will necessarily be stepped-off the pedal.

A quick word on interest rates in India because once again there is a debate on how much rates could harden in the next six months. What's your take, especially after looking at what the RBI said?

It remains unchanged. I still think that over the next 6-8 months there are atleast two more reverse repo rate hikes expected in India. With the last policy the RBI announced, initially there was fair amount of confusion on exactly what message they were trying to send across with hiking the repo rate.

But I think there is a stronger message by what they have not done i.e not doing anything to the reverse repo rate. Subsequent media comments by both the Governor and Deputy Governor of RBI seemed to support that.

I think the bigger issue quite apart from the interest rate issue which I just outlined, is how the RBI is going to go about dealing with the whole credit cycle issue. I think that becomes a much more serious issue when you try and put into context what real estate is doing. Real estate has a very big role in that.

It is going to be an extremely challenging task both for the government and the RBI, not just in terms of cyclical adjustments but purely in terms of how they go about communicating their intentions and handling the problem.

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