She sees a clear end to the Iran war and a cooling of the artificial intelligence (AI) trade as key factors that could improve sentiment towards India and support rupee appreciation.
Herrero says investors are not questioning whether they should invest in India, but when the rupee and markets will stabilise. While she sees some light at the end of the tunnel with foreign selling easing, she believes investors will need a more stable environment before returning fully to India.
This is an edited transcript of the interview.
Q: How would you read President Trump’s latest economic measures against Iran? Is this about broadening the war, the risk of retaliation by Iran, or is it just rhetoric that can eventually be tackled?
A: We have to start by saying that Iran has been under secondary sanctions for years. If everybody can recall, this was the Huawei case, with CFO Meng being arrested in Canada because of supposedly unlawful financial transactions with Iran.
So, this is not new. I think Trump is only reminding, mostly China, that they should stop feeding Iran with dual-use exports, military-related exports and financing Iran. I think that’s what it is.
But again, it’s not new. If that’s your question, this is really not new. It’s just Trump reminding us of something that the US has been doing for years.
Q: The other development has been the US Treasury stepping in to rescue, so to speak, which has calmed nerves and seen bond yields retreat. What do you make of it?
A: I think Bessent surely should have known, and probably, I don’t know how prepared this rescue was. But what is quite clear is that once the Supreme Court decided to eliminate tariffs, the US Treasury should have known, and probably did know, that it would reach the $40 trillion mark, an unbelievably high number, sooner than later.
And that is now, as we speak, $40.05 trillion or whatever in US debt. That number is scary if you think about a third of that, so from $30 trillion to $40 trillion, having happened since 2022, basically after COVID.
So, the accumulation of debt is such that I think this has been a panic reaction, if you ask me. I think that’s why the bond market has been so volatile.
And I don’t think this is a reaction that I would have made. I wouldn’t react this way, because it shows the market that the US Treasury is worried about the level of debt to the point of intervening.
Q: What about emerging markets and where does India fit in? If I look at all the emerging markets, India has relatively underperformed. Do you look at it in terms of global markets, emerging markets first? Where does India fit in in terms of the pecking order?
A: So, maybe I should say that I just wrote a piece on India’s need for renewed inflows. I focused in that piece on foreign investment and what India should be doing to attract more.
But I think the most immediate need is really portfolio flows. That’s basically the main reason, in my view, why the rupee is so weak.
For portfolio flows, I think India needs two things: a clear end to the Iran war, I mean, something substantial that takes away the high oil price risk from the rupee; and the second, of course, is a non-AI trade.
I mean, we have had a little bit of that during the summer. We had a lot of losses with major AI hyperscalers and you name it. But still, it wasn’t enough. I think it was not considered to be structural.
I think India will benefit from some sort of global regulation on AI, something that really shows that the AI drive will be softened or will decelerate. That would be really good for inflows into India and, of course, a potential appreciation of the rupee.
So, for me, it’s all about getting inflows from the rest of the world, not only resident inflows or issuing bonds by banks. I think genuine inflows. People who say, “Okay, this is the trade today. India is the trade today, because it’s the best hedge against AI. It’s the best hedge in favour of the end of a war.”
Q: In the last month or so, at least the selling has reduced on India. We had foreign institutional investor (FII) outflows that had really ballooned up, and that seems to have turned the corner a little bit. We got a couple of billion dollars, which is heartening to see after the kind of outflows. So, given that we are hoping that economic recovery takes place, earnings get into place as well, and hopefully the AI trade, as you mentioned, cools off a little bit, do you think you’d be a little bit more optimistic on India’s prospects?
A: First of all, I think if you think of purchasing power parity, the rupee is the best trade you can ever do if you want to hold it long term because it’s so cheap for India’s long-term growth. And therefore, I think it’s a very good trade.
The point is, where do you enter? I mean, I talk to a lot of investors, and their question is not whether they should invest in India, it’s when does it stabilise?
Watch the full conversation here
Yes, you’re right. We’re seeing a little bit of light at the end of the tunnel, but investors still worry that there will be a rebound on AI, a strong one, and then India will suffer again.
So, we need to see that kind of more stable situation remains in place for investors to come in fully.
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