Indian equities have corrected about 5% in the past one month. Although there are several headwinds, Raamdeo Agrawal, the joint managing director of Motilal Oswal Financial Services, sees high inflation and rising commodity prices as the biggest concerns. He believes the supply-side response has to be scaled up to meet the rising demand; else it will lead to further inflationary pressures. In an interview with fe?s Ashley Coutinho, he says that there is unlikely to be any significant respite from inflation any time soon, unless emerging economies make a concerted effort to tackle the problem.
The market is going through a turbulent phase. How do you see the Indian equities faring going forward?
The short-term story is clearly headwind-led, particularly because of inflation and the risk from high commodity prices. These headwinds cannot be tackled locally because the problem is more global. There has to be a concerted effort by China and other emerging markets to bring down inflation. At some point in time we might see some respite. I can?t say when. But when we talk of a slowdown, we think of India growing at 7.5% or 8%. It might seem off from earlier target of 8.5% or 9%. But it?s not all that bad. The long-term story is intact. All the plus points which have brought India so farwill continue to work in our favour. Corporate earnings are also still pretty solid.
What are the near-term and long-term headwinds that you see for Indian markets?
One is the commodity-led cost-push inflation. Second is the political set up which has not been able to push ahead with its development agenda in the right earnest. There?s a status quo on big decisions ? be it opening up of the insurance sector, allowing global retail majors to do business here, banking reforms or major infrastructure spends. The recent spate of scams will push decision-making further on the back burner. When aggregate demand is running high, supply-side response has to be on a war footing.
Is the global economy out of the woods yet? Are there concerns on FII inflows?
The worst is behind us and the global economy is only likely to see better days ahead. FIIs will continue to invest but sentiments could change. If the political lethargy continues, growth will slow down and inflationary pressures will rise. That will hit corporate earnings and, consequently, FII sentiments will be dented.
What are your views on Q4 results? Any areas of disappointment?
The results have broadly been in line with expectations but there have been no positive surprises, either. The companies that have declared results so far have recorded a 23% topline growth and 19-20% bottom line growth. There have not been too many disappointments except fora few like Infosys.
How will rising inflation and rising interest rates impact earnings?
The cost of doing business will clearly go up. The going will be particularly difficult for a a lot of mid-sized companies which are dependent on banks for funding. When you have a cost-push while the economy grows at 8%-9%, corporates can afford to pass on the increase in cost because the demand is very high. But the moment demand slows down to 7.5%-8%, it becomes difficult to pass on the costs, and that will hit corporate profitability.