in trade deficit. To fund the deficit, the government and the RBI have announced measures to attract foreign capital in India. As market recognises this, the rupee will stabilise.
Do you think the correction in market was an overreaction to interest rate concerns?
The markets were surprised by the RBI move on short-term rates as they were focused towards RBIís stand on inflation-growth dynamics. RBI's action was a text book way of raising the interest rates and controlling liquidity. The last time RBI resorted to this strategy was back in 1998 during the Asian financial crisis. While the street did not expect the central bank to cut rates, nobody expected the RBI to raise short-term rates. The message it gave out was that the RBI and the government are here to defend the currency, not at a particular level but to defend it against the speculative attack. That caught the street by surprise.
Higher interest rates badly impact the balance sheets that are leveraged. Indirectly, it sips into the banking sector. Just a few months back, it was expected that as the interest rates come down, the asset quality would improve. However, in the worsening scenario, even large-cap companies can also default, which is turning out to be a big worry. Given that the economy is slowing amidst high interest rates any company with high operating or financial expenses gets impacted irrespective of which sector it belongs to.
Export-oriented sectors do get a boost from the weaker rupee. Fortunately, it is not a small portion of the overall market, with IT and pharma becoming a reasonable part of the index, as also RIL. Further, as the currency depreciation takes place, consumption theme again tends to strengthen. In effect, almost 40-45% of the market is likely to weather the rupee depreciation.
Till the currency stabilises, the concerns related to markets may sustain. That in turn depends on CPI inflation. The RBI may not consider any loosening at all. Over the next few quarters, the asset quality problems may get much more intense and would be clearly reflected in the September quarter results.