India remains a top destination for global investors, said David Lynne, Head of Corporate Bank and Fixed Income & Currencies, Deutsche Bank APAC. While we may be seeing risk-off sentiment in the current environment, you can expect to see interest in the Indian financial markets revive in the coming months. India would be one of the beneficiaries as companies shift from China amid US restrictions, he said. Edited excerpts:
What are the biggest economic concerns and challenges amid the pandemic?
The key concern presently is the significant decline in growth that we are seeing across economies in the region. The first quarter of 2020 has been particularly severe in Asia with the Chinese economy alone having shrunk 6.8% and other countries in the region too feeling the brunt of Covid-19.
Asian economies are highly inter-connected through cross border trade and supply chains. The region has large parts of the economy that are driven by SMEs and small family run businesses. Governments across Asia have responded with unprecedented monetary easing and with massive fiscal support packages.
What is your take on easing lockdowns across the world?
Most countries are only beginning to come out of partial or total lockdowns. Reviving supply chains within the region is going to be a big challenge. Of course, the fear of a second wave of the pandemic remains a concern.
Covid-19 is also expected to prompt a change in the way we live, work, consume and commute. This will certainly have a bearing on businesses, forcing them to adapt and evolve. As banks, we have a responsibility in helping these companies navigate through these challenges.
How will the rupee move amid increasing focus on local manufacturers?
On the more negative side, the damage from a sudden stop in economic activity due to the lockdown; the relatively unclear outlook on when a significant portion of the economy can be allowed to get back online given a relatively poor medical infrastructure; and the lack of fiscal space.
But, on a more positive note, the demand destruction will likely narrow the current account gap in a material fashion, including because of low global oil prices; and India’s external balance sheet remains relatively healthy, with foreign exchange reserves closing in on $500 billion.
How do you see rupee valuation?
The currency is arguably overvalued versus its trading partners on a real basis. But, in such times when global trade is impacted more by an income shock, than relative price or cost disparity; the authorities are unlikely to proactively weaken the currency as a policy choice to gain competitiveness and/or protect local manufacturing.
What is your outlook on the rupee?
We think the risk on rupee is skewed to a move lower, but we don’t expect a crisis like repricing, particularly not with perma low global interest rates likely to keep rupee assets attractive from a carry perspective.
US is seen increasingly putting restrictions on China investments. How will it affect overseas investments in India’s local financial markets?
India remains a top destination for global investors and while we may be seeing risk-off sentiment in the current environment, you can expect to see interest in the Indian financial markets revive in the coming months.
The country remains one of the fastest growing economies in the world with one of the youngest demographics. The shift of manufacturing and supply chains was already accelerating before the COvid-19 crisis as trade tensions and rising costs of manufacturing in China led companies to move operations to other parts of Asia.
Who are the beneficiaries of such shifts?
India, Vietnam and Indonesia have been the main beneficiaries of these shifts. As India grows as a domestic consumption market, companies will be further incentivized to locate manufacturing closer to end consumers. This trend will be further accelerated by the Covid-19 pandemic as supply chains are shortened.
How do you assess India’s stimulus package announced recently?
The stimulus package is a mixed bag – long on some key structural reforms related to, for example, the role of the private sector, and making labour markets more flexible; but short arguably on the demand boost needed in the near term to help bridge the negative output gap that has opened up because of the coronavrius.
We estimate net spending outlay of only around 1% of GDP, which is underwhelming compared with the potentially 10-12% loss in output because of the current crisis.
How does Deutsche Bank plan to grow its corporate banking business in India?
Deutsche Bank has a very long standing corporate banking business in India serving both international and domestic clients across corporates and financial institutions.
Every area across corporate and institutional cash management, trade finance, securities services, Trust and agency services and foreign exchange have a substantial presence in the country.We see significant areas of business opportunity as our current clients grow, as new MNCs and Asian companies invest in the country.