Unstable govt after election may lead to exit of hot money

Written by Mithun Dasgupta | Updated: Apr 8 2014, 20:09pm hrs
With FIIs on a buying spree on hopes of a stable government after the elections, executive vice president & fund manager of UTI Mutual Fund, Sanjay Dongre, feels the country may see a shift in the fund flow from consumption-related to investment-related sectors. In an interview with Mithun Dasgupta, Dongre said any disappointment among the FIIs over the election results may lead to exit of money, taking a toll on the markets. Excerpts:

Sensex and Nifty have rallied to record highs on strong buying by foreign investors. Do you see the rally continuing

FIIs continued their strong buying in March, hoping for a stronger pace of economic recovery in FY15-16 once a new government comes to power. With the Sensex at over 22,000 levels, the market is quoting at 14-14.5 times earnings of FY15, and this is in line with the average valuations at which it quoted in the last 10 years.

Hence, the upside is limited in the near term. However, we could see a shift in the fund flow from consumption-related sectors to investment-related sectors as the pace of economic recovery gathers steam.

We have seen the US Fed decision to taper affecting the markets. Going forward, how are the Indian markets expected to deal with the QE tapering

India is better placed to deal with QE taper today than it was in May 2013 as it has taken steps to address external vulnerabilities. RBI has already mobilised more than $32 billion through FCNR(B) deposits, strengthening the reserves. CAD is likely to remain lower than $50 billion in FY14 on account of lower import growth (gold restrictions) and higher exports growth due to the depreciating currency. CAD is expected to be less than 2.5% in FY15. A large part of debt flows, which came into the country in January to May 2013, has already left the country.

Actual results are opposite to the concerns of reversal of hot money as the Fed tapers QE. We have seen debt and equity inflows in the last three months on hopes of a stable government and a rising rupee.

On other hand, Feds QE taper may result in a softening of commodity prices. As India is a large importer of crude and other commodities, the taper may work out to be beneficial and help India reduce inflation further.

Do you think a strong government at the Centre would fuel more market gains Would we see a market crash if a coalition emerges

A large part of the flows in the last three months can be attributed to the expectation among the FII community that a stable and reformist government would lead to a stronger pace of economic recovery. Any disappointment over the election results may lead to exit of hot money, leading to a decline in the stock market.

The US and the EU have imposed economic sanctions on Russia over the Crimea issue. Will this geographical uncertainty impact Indian stocks

The spillovers from the Russia-Ukraine crisis are likely to keep geo-political uncertainty high in the near term and, hence, could pose downside risks for growth in Russia and closely-linked neighbouring countries.

Europe has high reliance on Russia for its energy needs and Russia on revenues from the fuel exports. Hence, both EU and Russia would like to avoid tougher trade sanctions. Imports from Russia account for nearly 20% of total EU energy consumption. Any interruption on the energy trade may lead to sizable impact on the economic growth in EU as well Russia. Unless the crisis leads to much tougher sanctions and a war-like situation, it may have little impact on the Indian market.