Gary Dugan of RBS says when a currency falls, it also offers a solution to the underlying issue of lack of competitiveness. But India has to get its manufacturing act together
Gary Dugan is the CIO, Asia and Middle East, of RBS (Royal Bank of Scotland) Wealth Division. In this freewheeling interview to Forbes India, he talks about the recent currency crash in Asia, where the rupee is headed in the days to come and why you would be lucky, if you are able to find a three-bedroom apartment anywhere in one of the major cities of the world, for less than $100,000.
Q. What are your views on the current currency crash in Asia?
People are trying to characterise it as something that has happened in the past. I think it is very different. It is different in the sense that we know that emerging markets in general have improved. Their financial systems are stronger. Government policy has been more prudent and their exposure to overseas investors in general has been well controlled. I don’t think we are going to see a 12-month or a two-year problem here. However, countries such as India and Indonesia have been caught out and the money flows have brought their currencies under pressure. So, it’s a problem but not a crisis.
Q. One school of thought suggests that we are going to see some version of the Asian financial crisis of 1998 over the next 18 to 20 months...
I totally disagree with that. The rating agencies have looked at Indonesian banks and they have said that these banks are well able to weather the problems. If you look at India, the banking system is also enabled to weather the problems. It is not as if there is a whole set of banks about to announce a significant writedown of assets or lending. The only thing that could go wrong is what is happening in Syria. If oil prices go to $150 per barrel then the whole world has got a problem. Emerging market countries would have an inflation problem and that would only create an exaggeration of what we are seeing at the moment.
Q. Where do you see the rupee going in the days to come?
There is still going to be downward pressure. I said right at the beginning of the year, with a little bit of tongue-in-cheek, that in theory the rupee could fall to 72. At 72 to the dollar, in theory, [India] clears the current account deficit. I never expected it [the rupee] to get anywhere near that, certainly in a short period of time. But some good comes out of the very substantial adjustments, because pressure on the current account starts to disappear. Already the data is reflecting that. Where the rupee should be in the longer term is a very difficult question to answer.
Q. Let’s say by the end of the year...
(Laughs) I challenged our foreign exchange market experts on this and asked them what is the fair value for the rupee? I ran some numbers on the hotel prices in Mumbai relative to other big cities, and not just New York and London, but places like Istanbul as well. India is the cheapest place among these cities. Like The Economist’s Big Mac Index, I did a hotel index, and on that you could argue that the rupee should be 20-30 percent higher. But, if you look at the price that you have got to pay to sort out your economic problems, the currency should probably be closer to 70 than 60 for the balance of this year.
Q. One argument that is often made, at least by government officials, is that because the rupee is falling our exports will start to go up. But that doesn’t seem to have happened...
It takes a while. I was actually talking to a client in Hong Kong last week and he said that warehouses in India have been emptied of flat screen TVs, and they have all been sent to Dubai because they are 20 percent cheaper now. It is a simple story of how the market reacts to a falling currency.
Q. But it’s not as simple as that...
Of course. A part of the problem India has is that its economic model is based on the services sector rather than manufacturing. The amount of manufactured products that become cheaper immediately [after the rupee falls], and everyone says I need more Indian products rather than Chinese products or Vietnamese products, is probably insufficient to give a sharp rebound immediately. Where you may see a change, even though some of the call centre managers are a little sceptical about it, is that call centres which had lost their competitive edge because of very substantial wage growth in India, will immediately get a good kicker again. It would certainly be helpful, but I would say that it normally takes three to six months to see the maximum benefit of a currency adjustment.
Q. What are your views on the stock market?
Q. Inflation targeting by central banks has come in for criticism lately. Because a central bank works with a certain inflation target in mind, it ends up encouraging bubbles by keeping interest rates too low for too long. What is your view on that?
(This story appears in the 04 October, 2013 issue of Forbes India. To visit our Archives, click here.)