Ved Prakash Chaturvedi, managing director of Tata Mutual Fund, is bullish on the Indian stock market and doesn’t expect the ongoing momentum to be disturbed easily. In an interview , he shared his views on the many

risks that the market faces from factors external and internal. Excerpts:

The growth in industrial production, as reflected in the IIP numbers, was at 11.5 per cent for May on a year-on-year basis, which was lower than most conservative estimates. Are we entering a phase of slowdown?

If we look at the growth in industrial production over the past six quarters, it is evident that there has been a gradual improvement. It is clear that the Indian economy has recovered during this period and consumer confidence and business confidence have been coming back gradually. Even anecdotal evidence shows that be it sales of cars or consumer goods, there has been positive news in terms of volume growth. There could be some variations from quarter to quarter based on factors such as base effect, lower production on account of capacity constraints and seasonal lumping of orders in certain sectors such as capital goods and construction.



The bears have been pointing towards a couple of factors that may trigger a downslide. They include inflationary pressure due to rising fuel costs, the strain on liquidity and the risk of a drop in deposit growth and credit offtake.

India’s economic growth is driven basically by four factors. First and foremost, the demographic dividend and the consequent consumption demand. Second is the opportunity in building infrastructure. Third, opportunities arising out of the high quality skill sets available in India and the need for global outsourcing of certain key services. Last but not the least, in our view is the enormous opportunity in financial intermediation. Given the fact that there has been good and positive news flow in almost all these areas, the Indian market has outperformed.

Does this mean there are no risks?

This does not mean there are no risk factors. The key risks to the growth of the Indian economy and that of various companies come from continuously rising inflation and interest rates, geo-political issues including internal security, global oil and commodity prices, behaviour of monsoons and continued inflow of global capital. While many of these risk factors will play out over the next few months, we remain sanguine on the general outlook. Policy planners have been saying the rate of inflation will come down in the near future. Similarly, because of improving government finances and globally dampened interest rates, expectations of a significant increase in interest rates in India have come down. While geo-political issues continue to dominate the front pages of newspapers, they are not causing any serious concern to individual company valuations. India will continue to be dependent on global capital flows for sustained growth. So, anything that significantly affects inflow of this capital can pose a risk. But while there are risks, we remain optimistic about sustained growth of the Indian economy as well as high quality individual companies.

China has kept the world guessing with conflicting signals on a possible overheating and policy steps taken or planned to deal with the same. What impact could it have on our growth prospects?

India’s economic dependence on global markets is limited as the external sector of our GDP has relatively lower impact on growth rates. Concerns over the growth rates of some of the large economies in the world have been reflected in the relative underperformance of their respective equity markets compared with that of India. If concerns on global growth continue over a prolonged period, it can damage global investment appetite for India. This can cause valuation concerns for Indian equities. While many global economies are either seeing a slowdown and other concerns, the Indian economy continues to grow in a robust manner quarter after quarter. Major companies have largely disclosed an optimistic outlook with respect to business prospects for the next few quarters. Even the recent quarterly numbers have generally reinforced the prevailing positive sentiment. In our view, the Indian market will continue to respond to three key factors — earnings growth for individual companies, inflow of global capital and inflation and interest rate outlook. At the moment, there has been positive news flow in all these areas.

There is a view in the market that there could be a takeoff in earnings in FY12. Apart from the much bandied about infrastructure creation and consumption themes, tax reforms are anticipated to play a big role in this takeoff. How sanguine are you about these bullish forecasts?

The positive outlook has been reinforced by the fact that the 3G / BWA auctions have improved the central finances hugely. This as well as globally depressed sentiments and bond yields have restrained expectations of significant interest rate hikes in India. Funds are available for capacity expansion and infrastructure investment. Thus, the ground is set for a sustained positive sentiment in the Indian equity market. However, it should be remembered that relative to other markets, valuations are stretched in India. There will most probably be a phase of consolidation as the market looks for sustained earnings growth in the coming quarters. If this earnings growth is sustainable and analysts continue to project an optimistic outlook for the financial year ending March 2012 and March 2013, this positive outlook can gradually translate into higher individual equity valuations. Thus, the market will closely watch out for performance delivery in terms of earnings growth relative to analysts’ expectations over the next few quarters.

Will you not agree that the short-term outlook for the equity market indeed looks muddied?

The short-term and medium-term outlook for the Indian economy continues to be optimistic. Company after company has declared good results and generally talked about positive expectation of future growth. Ultimately, stock markets are a barometer of growth expectations. If these growth expectations are sustained, this barometer has to inevitably reflect these positive expectations. We have just come out of a significant upward trend in the equity market in the past 18 months. The market will digest this growth, consolidate a bit and watch carefully the sustainability of expected earnings growth. It is our expectation that if our GDP growth and earnings from key sectors are in line with expectations, we can sustain the good cheer in our market.

What kind of implications do you see on India from oil prices, which have already moved up from the average level seen in the last financial year, driven mainly by a revival in the developed economies?

Since India imports about 80 per cent of its oil requirements, international oil prices play a crucial role in Indian economy. High oil prices can put pressure on local inflation and the Indian currency, government deficits and also the cost structure of many industries. However, if oil prices remain in the range of $65 to $70 a barrel, the impact on the Indian economy will not be significantly adverse.