RBI Swap Facility Draws $17.4 Bn in FCNR(B) Deposits | HSBC Sees $50B More Inflows

[00:00:00]HSBC, uh has turned more constructive on India, upgrading its stance to neutral from underweight. Uh HSBC has also raised its Sensex target to 84,000 from 80,500 earlier, reflecting a more optimistic macro outlook. What's driving this shift, and what does it mean for Indian markets in the economy? We have Harold Wein uh Daryl Lindsay, he's head of Asia equity strategy at HSBC, and Pranjul Bhandari is chief India economist at HSBC. Harold, great to have you with us here. Pranjul, uh great that you could be here with us in the studios. Uh thanks very much. Uh you know, let us start with what is new and new new, which is the number which we've got from the Reserve Bank of India, uh Pranjul, because that's an important thing in the mix. Uh the big concern the last time we spoke was foreign outflows, and then we got these uh measures from the Reserve Bank of India, and RBI now tells us that these schemes in total have uh got us about 20 plus billion dollars, 17 and a half bought from the FCNR B scheme. Uh and uh the general sentiment is that this means that uh you know, you'd basically end up with, you know, a a much larger number compared to what people were anticipating till yesterday, day before yesterday. We had Federal Bank yesterday who said, "Well, the number could be 50 55 billion dollars." Perhaps looking at the disclosure yesterday evening, it'll be higher. So, just wanted you to mark to market. What What is your expectation here, Pranjul?

[00:01:15]>> Yes, yeah, thanks for having me. So, you know, we are broadly uh cautiously constructive across all asset classes over the next 2 months. Uh equity rates, FX. And I think one of the big reasons for that is, you know, this FCNR number, uh and what gives us confidence is the update that we got last night, that there have been inflows which have been quite strong and fairly front-loaded. Uh it basically gives a sense that, you know, it's it's off to a good start, despite all the problems that, you know, borrowing costs are very elevated at this point of time, which is true. And our sense is at this level, I think it's going to be even higher in August. So, broadly speaking, our estimate is that, you know, we could get, you know, about 50 billion dollars from the FCNR alone in this entire sort of three month window and then take about 10 to 15 billion dollars more from ECB and all of that. So, 60 to 65 billion dollars inflow which will really help the BOP and put it into surplus. Now, what this means for different asset classes is that a lot of this money, the 17 billion dollars, is yet to be swapped with the RBI and I think some of that is going to happen this week. And as that happens, domestic liquidity will increase. Once domestic liquidity increases, it's generally positive. You know, for bonds, it's positive for equities, maybe with a lag. And I think this is going to be a theme that will continue over August and that makes us cautiously constructive. I want to sort of re-emphasize why I say cautiously constructive. Why cautious?

[00:02:39]Because there are two other unknowns and one is where will oil prices go? I think anywhere 80 to 85 dollars a barrel India can handle, but if it's much higher than that, then it starts really hurting. And the second thing is how will RBI behave?

[00:02:53]You know, all of this money is coming in. FX reserves are going up. Now, will it use all of these dollars to stabilize the currency and how much? And what will it do with the liquidity? Will it allow it to float or will it take it out? And if it takes it out, will it be a crude mechanism and jerky or will it be very gentle? So, all of these are sort of like second, third degree things that I'll be looking at, but generally speaking, I think positive for the next two months.

[00:03:16]>> The rupee Pranjul, and that's where the cautiousness cautious sort of word comes in. The last couple of things that you mentioned, but for the rupee, sentiment has been poor, right? Why is that? I mean, is it because we thought markets thought that it'll get us a smaller number, but now we know it's a bigger number and perhaps as you said 60 65 65 billion dollars, right? In total.

[00:03:38]>> were actually getting quite positive.

[00:03:39]You know, I would say about a fortnight back, but then suddenly oil prices went up and the rupee is very sensitive to that. And before that, we also had a lot of NDF maturities, you know, and RBI allowed these maturities to happen. So, that also, you know, pushed dollar rupee up. So I think these have weighed on the rupee but going forward if you're going to get good inflows and markets gets the confidence that RBI has a good amount of FX reserves as ammunition which can be used in the future then I think that would generally be positive for sentiments around the rupee over the next month or two.

[00:04:11]>> You know dollar rates have also moved up lately.

[00:04:13]You think that will that will have an impact to these estimates or you think you're factoring all of that in? You know just yesterday we had as I said Federal Bank saying the world has been their feedback was it's slow and they have about a 3% market share in FCNR.

[00:04:25]So I'm just just asking whether and these schemes typically are back ended or because you said this is looks like it's front loaded but I would imagine that lots of lot of people try to get in towards the end rather than the beginning. I don't know just your thoughts.

[00:04:38]>> Well there are no real trends. In 2013 most of the inflows came in the last few weeks but remember 2013 was a fairly new concept. This time we all know about this so people have been more proactive.

[00:04:48]So it's quite possible that it's going to be front loaded this time. It's hard to say but but I do agree with people who say that borrowing costs are high and you know a lot of people were thinking that this could get us 100 billion dollars.

[00:04:59]You know it maybe it's possible but I think it's a little exaggerated from my perspective maybe not that much but I think we're sort of out there that we can we can aim for a 45 billion to 50 billion dollars given what has happened in in in in the first month. Coming to your point on what's happening to the dollar and you know dollar rates look whenever the the dollar appreciates it's a bit of a problem for emerging markets because of you know problems with outflows and all of that but this time around the same time we have all of these FCNR inflows. So in a way at least for now we can offset and overcome some of this dollar strength problem that would otherwise have hurt us a lot.

[00:05:33]>> A point