In conversation with Abhishek Goenka, Founder and CEO of IFA Global

Inflation is likely to cool off in the coming months on account of measures taken by the government and a normal monsoon, asserts Abhishek Goenka, Founder and CEO of IFA Global

Can you briefly explain the meaning and causes of rupee depreciation? Also, what is its impact on government finances? 

Weakness in the rupee can be attributed to the unprecedented stress that our current account and capital account are under, simultaneously. Our trade deficit this fiscal is tracking 8 per cent of GDP on account of higher crude prices (India imports 85 per cent of its crude oil requirement). Our trade deficit is usually around 5-5.5 per cent of GDP. Our current account deficit (CAD) is expected at 3 per cent of GDP this fiscal, which is usually around 0.5-1 per cent. Also, July is turning out to be the tenth straight month of FPI outflows from domestic capital markets.  

Higher crude prices are on account of the supply squeeze as a result of Russia-Ukraine war. Equity outflows are on account of Fed tightening and global risk aversion. The government has appreciably taken several measures to cool off raging inflation. It has cut excise duty on petrol and diesel along with import duty on edible oil. It has restricted the export of certain steel products and sugar. It has increased the food and fertiliser subsidy significantly over what was already budgeted. All these measures are likely to result in an increase in the deficit of around Rs 3 lakh crore.  

The recent measure of hiking export duty on petrol & diesel and levying windfall profit tax on upstream companies is likely to result in a revenue of Rs 1 lakh crore for the government. Considering the fact that revenue was conservatively budgeted, all the above measures put together are likely to leave a hole of about Rs 1 lakh crore (0.4 per cent of GDP). The fiscal deficit is therefore tracking 6.8 per cent of GDP against the budgeted fiscal deficit of 6.4 per cent of GDP. The government has several levers to avoid going in for additional borrowing. It may cut down on some of its expenses. Additional borrowing, if at all required, may be announced only towards the end of the financial year. 

With inflation taking centre stage, what is your perspective on the Indian equity markets? 

While FPI selling continues unabated, DIIs have supported domestic equities. Indian equities have outperformed in relative terms. While MSCI Emerging Market Index is down by 18 per cent YTD, Nifty plunged only about 8 per cent. Our valuations are now attractive with Nifty P/E being below its average of the last 10 years. With Fed communication now aligned with market expectations, we expect the pace of FPI outflows to slow down. Overall, we are therefore constructive on Indian equities unless we see a major flare-up on the geopolitical front.  

 

How will the forthcoming rate hikes by Federal Reserve affect Indian debt markets? Will high volatility in currency persist over the next few months? 

This is one of those extremely rare times when the inflationary pressures in India are muted compared to the US even if we take into account the difference in the CPI basket of both countries. We believe that RBI will focus more on domestic factors in formulating monetary policy.  

Inflation is likely to cool off in the coming months on account of measures taken by the government and a normal monsoon. This RBI regime so far has been in favour of keeping real rates negative to boost growth. It has resisted the temptation to raise rates swiftly to defend the rupee. As it is, past experience suggests that aligning our monetary policy with Fed policy during a Fed hike cycle has proven to be counterproductive. This is because, in the case of India, it is the equity flows and growth outlook that drive sentiment rather than debt market flows.   

One-year overnight indexed swap (OIS) is currently around 6.3 per cent and we believe that it fairly represents where the repo rate could be by the end of one year i.e. close to 6.75 per cent. We do not see a much more aggressive rate hike cycle than what the OIS market is already pricing in at this stage.  

The volatility in USD/INR has been fairly contained until now as a result of RBI intervention. Three-month implied volatility is at 5.65 per cent and is nowhere close to the peak that we have seen during major crises in the past. RBI deserves credit for that!