Oil remains India’s Achilles heel: Parekh – Times of India

Deepak Parekh, chairman of HDFC, has been part of the financial sector for over four decades and has been the voice of reform. Having interacted with international investors over business cycles, Parekh has a good idea of the opportunities and risks that India faces because of global factors. In an interview with TOI, Parekh speaks of what needs to be done to ride the energy turmoil arising out of the war in Ukraine…
You have seen many economic cycles and disruptions. How do you view the current market turmoil and its impact on India?
As far as the current stock market turmoil is concerned, I think India has borne the unintended consequence of being a well-performing, growth-oriented market. While emerging market (EM) outflows had begun following the Fed’s signaling of raising interest rates, the Russia-Ukraine crisis intensified the outflows. Certainly, geopolitics creates risk averseness, which is par for the course for all equity markets.
Many large EM funds with exposures in Russia and China also have India exposures. With the writing down of their Russia exposures, the best way to cut losses and meet redemption pressures is exiting other profitable investments. Indian equity markets provided that opportunity. Foreign investors also have confidence that Indian markets are liquid, efficient and easy to operate in.
While domestic institutional investors have countered some of this exit, I remain confident that long-term investors will flock back to India sooner than later. One has to be patient, and inevitably markets tend to price in such risks. China’s slowdown, though, remains a key monitorable.
What is the pulse of global investors now, especially with respect to India? Can India distinguish itself from other emerging markets?
What was surprising to me when I was talking to a number of global investors is that they feel that — given India’s growth potential, political stability, rapid scale-up in vaccinations, promising entrepreneurship, its digital stack and rising middle-class, among several others — the country still doesn’t get its rightful place on the international stage, especially in terms of coverage by the foreign press. There often tends to be a bias towards negative news coverage by the international media on India. We have to consciously work to change this perception or raise awareness on this.
How do you see the spike in commodity prices impacting the real estate sector?
I have reiterated before that I have never been as optimistic about the housing sector as I am currently. The demand for housing is palpable, the pipeline of new launches is strong and there has been a flight to quality and consolidation among developers.
Yes, commodity prices have spiked, but it is important to remember that land tends to be a very large cost component — especially in bigger cities, while labour and construction material costs form a significantly smaller proportion of the overall costs. A 10% increase in construction costs can be absorbed, so concerns of dampening demand is unwarranted at this juncture. For fence-sitters, it may be a good time to buy a home.
Oil is a difficult market to predict. Does India have better buffers to protect itself from rising oil prices?
Oil remains India’s Achilles heel. The crisis has brought home the realisation that globally, countries are still very dependent on oil and gas. This may well be a catalyst to recalibrate the energy transition strategy. Globally, we now recognise that under-investment in oil and gas by strangulating funding to the sector hurts the common man the most. India cannot afford this.
To my mind, it is the existing energy sector players that are best suited to transition to increased renewables and clean energy. The government has rightly thrown its weight behind encouraging India’s renewables sector, but this transition will need radical power reforms, the passing of the Electricity Amendment Bill and other privatisation initiatives.
That said, oil prices remain very hard to predict with the lows of $20 and highs of $135 per barrel seen over the past two years. Today, the country is much better positioned as India’s strong export of software services helps cushion the rising oil import bill. Another plus point is that India has excellent relations with key countries where it imports oil from — particularly Saudi Arabia and the UAE.
Do you feel public issues will retain their momentum in the new financial year or will IPOs taper off?
The pipeline remains strong and the mega LIC IPO is still waiting in the wings. With tighter regulation and the hindsight of the need for rational pricing, I think the IPO market will get back on track. The age-old lesson of leaving something on the table for investors remains key. We are going to see more unicorns and other companies list, with more private equity investors wanting a market exit. Simultaneously, the divestment programme will have to gather pace. All of this will perhaps be at more sustainable valuations. But overall, I remain confident about India’s future growth prospects.