India may have permanently lost a fair share of fund flows to markets like Thailand and the Philippines, which have seen several upgrades by the rating agencies in the recent past, says Gary Dugan, CIO, Asia and the Middle East, RBS Private Banking. In an interaction with

Devangi Gandhi, Dugan says that though India is relatively better placed than its BRICS counterparts, the weakness in rupee may act as a headwind for incremental foreign fund inflows.

How sooner do you see the US Fed winding its QE programme?

All that happened in the recent past is that Bernanke’s power in the FOMC committee changed. He was no longer able to lead the committee to a conclusion that they should go slow on weighing QE wind-up. Clearly, there was an active debate in the committee given that Fisher of Dallas Fed has voiced out his discomfort with lower rates. In the wake of lower inflation, GDP growth and unemployment rate were deemed the yardsticks to decide tapering of the QE. We have heard Bernanke in the past saying that the unemployment rate target may be reduced. They may still reduce the target rate to 6.5% from 7.5%, extending the period for which the monetary policy could remain accommodative.

They could do two things. The policy statement could start hinting that their target unemployment rate has changed. The nuances, on the other hand, could indicate that they are not seeing the growth come through quickly enough and, therefore, the QE would stay at a particular level for longer. So the market would then take a hint that the tapering may be postponed by one or two months now. This kind of indication may come as soon as in the next meeting even as the stance on unemployment rate may be communicated in later meetings. The interest rate increase may be considered in the back-end of 2014.

Although recent fund-flow data suggests a massive exodus from EM markets, India has witnessed a relatively moderate outflow in June. How do you think it would be placed hereon compared to its peers?

Given that India is likely to see an upgrade in the earnings forecast while interest rate trajectory is looking down it appears relatively better placed. None of the other countries in the BRICS universe offer affirmative developments. Although the Russian equity market is cheap, investor concerns over corporate governance and government interference could still hold the market. In Brazil, domestic growth is weakening, but higher-than-expected inflation is holding the central bank from any easing. In fact, we expect a further 50 bps increase in interest rate in Brazil. A lot of money is still sitting in the BRICS funds so even a re-allocation of the current pool of capital with no new flow, could see India receiving renewed flow later this year.

Having said that, I think India may have permanently lost a fair share of fund flow to markets like Thailand and the Philippines that have seen several upgrades by the rating agencies in the recent past while India’s rating is still under watch. Even from Middle-East there have been additions in the emerging market indices, which also take their share from the total EM-focussed inflows as they don’t face any deficits-related concerns. However, India would not be the biggest loser as Brazil and China are likely to be witnessing a higher reduction in their shares.

How do depreciating currencies impact fund-flow to these emerging markets?

EM currencies are under pressure due to a broader appreciation in the dollar. Brazil’s real has been falling since 2012. The Russian currency appears to be more manipulated. China’s renminbi is appreciating but may not continue on that path. While there are expectations of the rupee to fall further, it is difficult to ascertain a fair value at this point.

We have heard reports that inquiries for real estate investing have gone up substantially in the south Indian hot-spots. The level of the rupee is not necessarily a driver for putting in more money. Although the weakness in rupee supports exports it raises imports significantly. It can act as a headwind for incremental inflows given that investors have to factor in the risk associated in the estimated yields.

China has failed to witness a revival in growth as was expected in the beginning of the year. Do you think its GDP growth would continue to drop in second half of 2013?

China has faced a combination of concerning developments. Policy makers took plenty of measures, including lax liquidity, between 2008 and 2011 to keep their economy going. What we are

only just discovering is that the

money that was poured in its economy during this period was wasted to an extent, and China is now exposed to a

lot of losses on the investments that were made.

While we knew there is a regime change in China, most people expected the new government to follow the footsteps of all previous policymakers. However, the new regime was soon in action with a massive anti-corruption drive that had a very dampening impact on growth. The policymakers kept going even as growth collapsed. They maintained an opinion that they need to sort the financial system now with no lending to the regional government. About a fortnight ago there was a spike in the short-term interest rate as there was a scare that the financial institutions will follow the central government.

These measures are good news for the long-term and its impact would be seen five years from now. However, the pain they are going to cause in the near-term is quite substantial, including its negative impact on the equity market. The financial market is not ready to witness China?s GDP growth below 7%.

The other problem is the impact of a fall in the economic activity on the employment rate. As in the case of Hong Kong and Singapore, the problem China could face now is an increase in the unemployment rate alongside substantially high housing prices. This could have a very negative social impact. China may look like quite a mess and that could have an impact on the global sentiment and gold prices.