While the markets continue to be under heavy pressure,
Lakshmikant Reddy, executive vice-president and head (equity), ICICI Prudential Life Insurance, reckons the above-average monsoon as one of the few bright spots this year, as it is going to keep the rural and semi-urban demand strong. At a time when the rupee has fallen to fresh record lows, he tells Jash Kriplani that one needs to wait and watch if RBI?s measures are actually helping in stemming the fall. Excerpts:
How do you see the rupee depreciation playing out in markets?
The currency depreciation will eventually have a negative impact on the economy and hence on the market. Of course, sometimes market sell-off and rupee depreciation could be simultaneous if FIIs withdraw money from the market ? exactly the reverse happens when inflows surge. In an export-driven country such as Japan, currency weakness makes them competitive and their market goes up, whereas in our case it is the reverse as we are an import dependent country.
Do you think RBI?s measures will help in reducing current account deficit (CAD)?
We will have to wait for a month or two to check whether the trade deficit has narrowed, whether we have managed to attract more debt inflows. These questions cannot be answered now. Market is moving up and down purely on expectations.
Where do you see the markets heading? What would be the important global cues going ahead?
We were expecting markets to remain range-bound till the current calendar year and were expecting a revival to take place from beginning of the next financial year. However, the sell-off in emerging markets on the back of QE tapering and liquidity-tightening measures have delayed the recovery. The strengthening of the US dollar and rise in US bond yields has hurt the local unit. What incrementally happens in the US may have a positive or negative impact on the markets.
What do you expect from the US Federal Reserve in terms of tapering of the quantitative easing programme?
The fear, thus far, has been that once the US Fed stops buying bonds; it will lead to a rise in US bond yields. So far, the Fed has done nothing of that sort but Bernanke has been raising expectations on a likely reduction in bond purchases, going forward. It is not clear whether the 1% rise in 10-year US treasuries, which already happened over last two months, has already discounted the end of quantitative easing or whether the yields will rise further. Overall, one can expect that a hawkish US Fed will have negative impact on the non-US markets.
Do you see markets gaining from election spending? What would be the triggers for the market?
It is not clear whether the government has much spending power this time, given that we already have a high fiscal deficit and the forecast is that fiscal deficit for the next year is at risk due to slowing growth. However, owing to good monsoon and political spending, if any, it is likely that rural consumption remains the least affected segment in the slowdown. Among positives, the above-average monsoon is going to keep the rural and semi-urban demand very strong. However, for bulk of corporate India, the July-September quarter poses a tough challenge if rupee continues to remain weak as that would translate into higher input costs.
What is your take on the recent set of reforms undertaken by the government?
The government has done quite a few good things over the last six months to address deficit problems, to improve decision making on the investments front and on FDI. However, some of these will take time to bear fruit.