After the weak growth forecast from the CSO and a set of dismal IIP data, things are looking pretty bad. What kind of impact are they going to have on the market movement, going forward?
Much of the recent data shocks, be it IIP, CPI, GDP or CAD, has been known for some time and in some sense are backward looking. Yes, it does convey to public what was being feared, but the reasons for the cyclical slowdown go into the past. With a new invigorated government pushing ahead on reforms, data points should look better in the future. Also, these data points have reminded policy makers that India faces serious macroeconomic imbalances, which need to be corrected. Given that the steps being taken over the past five-six months have all been in the right direction, we think the market should do well over the next 12 months.
Global turmoil apart, what would you blame for this state of affairs? Do you think the government’s reform moves came in too late in the day?
Yes, it would have been better had the reform process started earlier. However, high inflation, trade deficit, corporate indebtedness, low capacity utilisation, rupee volatility and reduced savings are some of the problems that contributed to the current state of affairs. We are hopeful given that the government has taken some tough decisions and is implementing key reforms, which seemed very difficult six months ago.
Would you say RBI was behind the curve in pushing growth? Is the recent rate cut enough for some damage control?
Although RBI has been vigilant and committed about bringing down high inflationary pressures that the economy was facing, we believe growth is extremely important, especially for an emerging market like India and appropriate balance should be maintained between growth and other economic parameters. In that sense, we think RBI was a tad late in supporting growth and it would have been better had it started this exercise a bit earlier. As WPI, core inflation has come down to expected level and there is evidence that the government will meet its fiscal deficit target for the year. RBI has indicated a shift in policy stance from anti-inflation to growth focus and we expect it to cut rates in the coming quarters. There is expectation of 50-75 bps rate cut in this calendar, which would encourage investments and support growth.
What are your five major expectations from the Union budget? Do you expect any sops for capital market investors?
The budget is expected to be pro-growth and fiscally responsible. The finance minister has indicated that the budget would focus on cutting wasteful expenses and promoting investments. Revival of the infrastructure sector and capex cycle, reinvigorating animal spirits, deepening the bond market and enhancing foreign investments are expected to form the heart of the budget. One can also expect grant of infrastructure status to the affordable housing sector. Also, we expect the finance minister to re-emphasise his willingness to implement GST soon and present a roadmap towards getting there and announce the implementation of the direct tax code.
Some of the recent studies show FII holdings in the Indian market have risen strongly over the past few months putting them in the driver’s seat on Dalal Street. How do you look at this, and how risky is it at a time when global economies themselves are very volatile?
Emerging markets are benefiting from global liquidity being pumped in by central banks. India too is a beneficiary of the same. FII flows are volatile inherently, which is borne out if one looks at the flows in 2008 after a good 2007. Generally, India is an important destination for global flows looking for robust and sustainable growth with a very sound overall financial system. In case there is no change in the current macroeconomic environment worldwide, we expect strong FII flows to India to continue.
DIIs, including mutual funds and insurance companies, have been net sellers for several months now? Is it a case of positioning or is it a case of strong redemption pressure?
The stock market has given close to 30 per cent return in 2012 after a long period of underperformance. This has led to redemptions by domestic retail investors, which has forced domestic institutions to sell equities despite having a promising market ahead.
How do you read the earnings numbers for the December quarter? Is there any sign of the greenshoots that finance minister P Chidambaram had famously claimed in October?
The earnings season has been very mixed with revenues growing 14 per cent, and profits growing 11 per cent. There has been a margin contraction of 50 bps. Overall, there have been more disappointments than positive surprises. We think reforms initiated by the government and reduction in interest rates should support growth with a slight time lag.
Do you see any earnings downgrade/ upgrades after the December quarter numbers? If at all, which sectors are seeing a turnaround in fortunes?
There might be some downgrades in commodities, auto, FMCG and upgrades in software companies. I think the IT sector might see a slow turnaround.
How have you played the market in the ongoing phase of consolidation? Would you advise investors to buy on dips at this stage?
Since we are a long-term investor, we have used corrections to buy into the market and are comfortable holding our portfolio without much churning. For long-term investors, this might be a very good time to build a portfolio, since we see significant upside over the medium term.
What is your outlook for the rupee in the near term, say in the first two quarters of FY14?
We expect the rupee to remain volatile within a wide range of 53 to 56 over the next few quarters. While there is a worrying trend of trade deficit, capital flows would help finance the gap comfortably. We expect India’s current account deficit to moderate over the medium term due to a combination of improved exports and a drop in value of two of our biggest import items, crude oil and gold. This, along with abundant liquidity coming in the form of FDI and FII flows, will help the rupee appreciate over a two-three year timeframe, albeit with periodic bouts of volatility. zz