Low inflation, revival of growth cycle to help India Inc

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Published: January 16, 2015 1:10:41 AM

India will be one of the few bright spots globally in terms of growth, investment opportunities.

India will be one of the few bright spots globally in terms of growth, investment opportunities. Projections of lower inflation and revival in growth cycle will help a lot of foreign investments into Indian markets, both in equities and debt, says Rashesh Shah, chairman & CEO of Edelweiss Group.

In an interview with Ankit Doshi, Shah said the unscheduled rate cut by the RBI was more unexpected than surprising and that the commentary, not just the decision to cut rates, was positive. The rate cut also augurs well for the government in conducting PSU stake sale and achieve its 4.1% fiscal deficit target. Excerpts:

The RBI move caught a large section of the market by surprise. What is your immediate reaction? A cut in key policy rates was expected in the first quarter, but was this too soon, especially in the view of the policy meeting being two-and-a-half weeks away?

No. I think the RBI governor had indicated that a rate cut could come even before the next policy meeting. It was a very explicit instruction in that way. Obviously, the move took the market by surprise. That’s number one. But to my view, the move was more unexpected than surprising due to the timing, especially given the fact that RBI meeting is around the corner and all expectations get built-in just before the RBI policy day. The second thing is that everybody was thinking about RBI will wait for inflation to stabilise. But I think the commentary, not just the decision to cut interest rates, is also positive. The commentary seems exciting because it indicates that the RBI is convinced that inflation has come down and is here to stay lower, and that is very positive.

In that case, what is your projection on the interest rate cycle for the next 12-15 months period?

We expect interest rates to decline by an additional 100 bps in this year, that is, before March 2016. We had earlier expected about 100-150-bps cut and, given the decision by the RBI today, we maintain that view.

What is the road ahead for the equity markets keeping in valuations, fund inflows especially from global investors, and the corporate earnings? After this so-called “shift in policy” stance, you think foreign investors will take note of Indian equities? Do they become more positive?

I would think so. To the foreign investors, this shows that India growth story will get strengthened. Sticky inflation, the only macro-economic parameter which India was struggling with. But now with the inflation expected to remain under control and if the growth cycle expected to revive, then, overall, India will be one of the few bright spots in the world in terms of growth and investment opportunities. That should itself help a lot of foreign investments into Indian markets both in equities and debt.

Any ball-park number to the kind of FII inflows you see this year? Although it’s just the start to 2015, Indian markets have seen some outflows. The same has been the case with other EMs like China, Russia and Brazil.

A) It’s hard to predict a range or the exact number to the kind of foreign inflows we could see this year. But we should continue to see consistent amount of foreign inflows seen in the last recent years. I think one should expect corporate earnings growth rate over 18% and that itself will be good enough for our markets because many parts of the world are growing at a slower rate.

What is your view on the bond yields over one-year period? Does any decline mean that investors should look at debt and not equity in 2015.

I think 10-year G-Secs should come down by another 40-50 basis points. If you see the last four-five months, a lot of FII flows have come into bonds than in equities. In my view, the bond markets are getting as exciting as equity markets.

What kind of an investment strategy would you adopt?

With the interest cycle on a declining trajectory, cyclical are expected to do well. Banks, infrastructure, real estate are expected to do well going forward.

What is your view on the government’s fiscal deficit road map, especially the disinvestment programme?

When a rate cut happens all asset classes such as equities and bonds do well. So, from that perspective, the rate cut is also good for the government because the Centre is usually going to borrow a lot of money. Whether through equities or bonds, the government is going to need a lot of money. Also there were doubts on certain big-ticket government transactions and the thought of giving huge discounts to the market. But with the rate cut and this likely turning point for the markets, at least in the near term, it could be a smooth or an easy walk for the government to meet its disinvestment target. It will become easy for the government to conduct PSU stake sale because of the market momentum as well as the scarcity of good investment stocks. With the infrastructure cycle expected to turn, there will be a lot of PSU banks that will be raising money and it will become easier for them. PSU banks will benefit from treasury gains, also along with that companies are expected to do well so the NPA cycle will turn for good. So, on the whole, the government’s disinvestment programme, which includes off-loading shares in PSU banks will see strong and positive momentum.

You mentioned about 18% corporate earnings. What’s your word on valuations from that perspective. Are Indian markets overvalued?

Growth is still ahead of us and as growth comes in, the market valuations will price that in. I don’t think the market is overvalued. We are reasonably valued.

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