‘Budget has improved chances of rate cut’

While 2016 began with a lot of volatility across global markets, the risk-on environment has triggered fresh rallies in emerging markets such as India.

Speaking to Bloomberg TV India , Birla Sun Life Asset Management’s Co-Chief Investment Officer Mahesh Patil says the fiscal prudence observed in the Budget coupled with reduction in interest rates on small savings instruments have increased chances of RBI rate cuts. While earnings could still show a gloomy picture especially for banks, there are pockets of recovery like in cement and rural demand, he said.

How are markets looking like since the last year?

Well I think clearly on the global front, we are seeing things normalising a bit. We have also seen that the emerging markets, which were tagged under the bad-asset category last year, have seen a kind of a turn-around and we have seen decent inflows in the last one month or so. More importantly, we have seen commodities, which were reeling under pressure last year, a kind of bottoming out and a rally. So it is kind of a risk-on environment globally. As a result, we have seen inflows from FIIs in the last couple of weeks. In fact, since the Budget day, we have seen inflows of almost close to $1.8 billion. On the domestic front, I would say after the Budget, the chances of rate cuts have increased. You have seen the bond yields, which were pretty stubborn at around 7.8-7.9 per cent, has now gone below 7.5 per cent. And as a result, I think expectation of monetary transmission has also increased. We saw a couple of days back, the interest rates on small savings, PPF, Kisan Vikas Patra were reduced significantly by 60-70 bps. So, what all that means is, the interest rates in the system will go down and that will help companies, especially those which have been highly levered. So there is some relief over there. More importantly, as far as the banking sector is concerned, the government, along with the RBI, is trying to put pressure on the banks to go after recoveries.

The NPA problem has been recognised to a large extend and I think the next step in terms of recoveries is getting accelerated. I think these are some of the positives.

And as a result of these events, I think the markets have rallied. But I think more needs to be done with the liquidity situation.

The challenge for fund managers is that even though we speak in terms of long-term perspective, investors keep looking at 3-month data and ask for results? Where will you be in the next three months in terms of sector allocations to maximise returns from the market?

Three months is too short a period even if you are constructing a portfolio. Normally, we would look at a 6-month or a one-year time frame because you can’t get in or get out of your positions. But, I would say that over the next three months, you will have the quarterly numbers coming in and they are not likely to be anything better than what we saw in the third quarter. In case of the banking sector, some of the banks which reported poor numbers in the third quarter will continue to do so in terms of recognition for bad assets. So I think even in this quarter, one has to be a bit careful.

But apart from that, what we are seeing is the broader trend — if you see medium-to-long term, you will see that some of the domestic sectors are seeing some signs of recovery, especially driven by government spending. We have seen some uptick in the cement demand in the last couple of months. And the consumption is something which we are pretty positive in terms of medium-term outlook because in the last two years the urban demand has been weak and rural economy was also under pressure because of the bad monsoons.

And now the data shows that the monsoon this time should be pretty normal and also the Budget has put a lot of emphasis on the rural and agri sectors. So that should help spur rural demand. So given these factors, one can look for the growth rate to improve than what we have seen in the last one year or so.