Please give your projection for economic growth in the backdrop of monsoon deficiency, and its impact on the stock market.
The consensus estimate for GDP growth during financial year 2009-10 is between 6 to 7%. This was based on normal monsoon and the improvement in the business and economic environment post the global downturn in 2007 and 2008. However, the monsoon has not only been delayed but has also been deficient although the quantum of deficiency seems to be reducing with various parts of the country reporting fresh bouts of rainfall. It is therefore a little premature to be able to quantify the impact on agriculture growth as well as the resultant adverse incidence on GDP.
Experts are engaged in assessing the impact as the process is very complicated in the sense that different regions in the country will have different quantum of rainfall and the ability to salvage the crop from either late sowing or by alternate crop. It is however confirmed that there will be an impact of both delayed and deficient monsoon on kharif crops as also marginal impact on rabi crop leading to reduced purchasing power of the rural population, higher inflation of agricultural commodity and lower off-take of consumer goods. The Central government has initiated several measures in cooperation with state governments to mitigate the damage likely to be inflicted on rural masses as well as its adverse impact on GDP. However, despite these efforts the GDP could be impacted between 50 to 75 basis points and the resultant GDP growth during 2009-10 could be in the range of 5.5 to 6%.
The impact of the lack of normal monsoon is to some extent discounted in the stock prices of the companies which are likely to be affected. The top line and bottom line will reveal the impact in the 3rd and the 4th quarter. Since Indian economy is now less dependant on agriculture, we may not see very severe impact on the market provided global economic situation does not deteriorate and the government continues to take the required steps to support growth by appropriate reform and fiscal and monetary measures.
The markets are reviving. Where do you see the Indian market headed for
Markets have revived globally from the bottoms that they hit in March 2009, on the back of the assessment that the worst for the global economy is behind it. The rate of decline has reduced and the contraction is lower than expected. While the financial markets have stabilised the credit flow has resumed. The reliance on debt is reducing in favor of equity infusion. The investors and lenders are willing to provide both equity and debt capital. The government across the board has infused unprecedented liquidity into financial markets as also bailed out major financial institutions. This has lead to revival of confidence resulting in value buying in various asset classes like reality, commodities and stocks. Markets are always liquidity-driven apart from being influenced by fundamentals.
The fundamentals of the Indian economy are pretty strong and lead by both consumer demand and investment demand. While the investment requirement comes from huge physical infrastructure need, the consumption demands are expected to remain strong from inclusive growth and the favorable demographic structure of the Indian population. Given this background, the medium to long term outlook for the market is very positive. However, in the short-term, the markets may see volatility and corrections due to change in the liquidity flows. Having seen a significant rise from the bottom the market should consolidate and align with the current and forward earning estimates before rising further on re-rating potential which India does definitely have. We believe our markets will definitely cross previous highs in the foreseeable future and head even higher given the potential of economic growth in the country.
The IPO market is reviving again after a long period. Is this sustainable, and how does the market approach IPOs currently
As stated before, our country needs huge funding resources to meet our infrastructure needs. This will therefore necessitate fund rising both from domestic investors and overseas investors. Sectors like power, roads, ports, housing, telecom, oil and gas and other infrastructure industries like metals and cement will have to raise resources from the capital market. The divestment programme of the government will also lead to public offerings. Banks and financial institutions need to be strongly capitalised. Since the financial markets were in turmoil in 2008 and part of 2009, we will see several companies raising funds which were earlier deferred as well as for their ongoing requirement.
The initial offerings have come from the fund-starved sectors like reality which will be followed by other sectors like power, metals, cement, oil and gas and finance. The IPO market will definitely sustain provided the pricing is right and the fund raisers leave something on the table for the investors. The investors need to be selective and invest in IPOs of fundamentally strong companies or the companies whose management is reliable and business model strong. We do believe good projects and strong management will be able to raise funds both from domestic and overseas investors through a variety of offerings like QIP, IPO, rights issue, private equity funding and FCCB.
Exchanges are gearing up to launch interest rate futures. How will the market receive this new product this time vis--vis its earlier existence in early 2000s
It is a sophisticated product and meant for institutional players. Our financial and money markets are expanding and we are seeing growing presence of large players in banking, insurance, infrastructure and other financial institutions besides mutual funds. With a large savings oriented economy and each player moping of funds for long tenures would find these instruments helpful for generating risk adjusted returns for their investors as well as balancing their own cost. It may see a slow start but is sure to pick up as we progress and new instruments get added which will invite wider participation from domestic and international players.
Broking business in general has been reeling under the falling markets for some time. How is the broking business faring now
We expect robust economic growth and financial markets will be a key contribution to this growth. There are strong hopes of reforms in the financial sectors. As the savings pie increase and as savings get aligned into short term, medium and long-term investment either directly or through products from institutional players like mutual fund, insurance, pension funds, the stock broking business will see far higher volumes. The intermediation cost may come down and the platform could also gradually shift to e-broking, the revenue potential remains significant. While the broking business has always been reflective of market sentiments and volume in short-term, this business has great future and particularly in India, where the penetration of equity as an asset class is very low and there remains tremendous potentials for commodities, currencies index futures options, ETFs and other innovative and sophisticated products.
The first two quarters of the current financial year have been much better from the preceding two quarters of the last financial year and we hope 2009/10 will be a much better year as compared to 2008/09.
Is the worst over in terms of global recession
It does appear that the global economy has already hit the bottom and getting out of the recession. The trick lies in the unwinding of liquidity infusion and managing the inflation that may follow the stimulus provided by governments across the globe. While in the emerging economies like India and China, recovery will be faster than the US and Europe, there could be pitfalls along the way in some of the developed economies as the reliance on liberal credit at low cost over a long period of time lead to the financial market turmoil. The US and European economy have to return to prudential and fundamentally strong policies to help resume on the path of sustainable long term growth.
Speaking for India and some of the other economies in Asia, Eastern Europe, Middle East, Africa and South America, it is expected that faster growth in these markets will balance for the slower growth in other markets as there will be both consumer and investment demand in these countries and their potential to meet the import requirement of the developed economies. We believe that barring some unforeseen circumstances the global economy should resume slower and steady growth with India and China outfacing others. We dare to say that now India may start outfacing China and hence could see significant inflows from global investors both through FDI and FIIs.