While the domestic economic fundamentals are showing visible signs of improvement, investors are still nervous on the risks emerging from the global stage — a possible Brexit, Fed rate hike cycle and the IMF’s projection of a slower global growth. In an interview to Bloomberg TV India, UTI Mutual Fund’s Managing Director Leo Puri said India is better placed than other emerging economies, with the economy growing 7-7.5 per cent and the twin deficits under control.

Whether we talk about the currency, fixed income or equity markets, there has been a whole lot of volatility and it is really showing no signs of ebbing. How worrisome do you think this is and how much has it really impacted sentiment?

I think at this point, on the one hand India is probably having the best situation since 2009. We know that we are on a steady growth path, somewhere between 7 and 7.5 per cent. We know that we have controlled the twin deficits (fiscal and current account deficits). We are seeing FDI inflows, which are fairly strong, and we have a relatively stable currency. And as per last week's credit policy, we actually have an interest rate environment, which is turning benign, with rates likely to trend downwards subject to inflation. Oil prices have remained fairly helpful for segments of the economy. Now despite that, of course there are worries.

There are two sets of worries. One is that you have deep concern about global imbalances that have not gone away by any means. I think it is likely to resurface in two or three months, when once again we see the developments in the US and Europe, and how they impact us. And the other is, there is still some debate going on as to what is really going to be the government’s commitment to economic reforms as we move forward.

How do you view the RBI action on liquidity and how do you see the roadmap going ahead as far as the RBI rate cycle is concerned?

I think the RBI action was very well calibrated and exactly as per our expectations. We had not anticipated a deeper cut of 50 basis points, it might have been premature to early to call a victory over inflation at this point. I think the (RBI) Governor is right to watch inflation and to wait for monsoons and transmissions to actually take effect. So I think much of what is seen is reflected. The liquidity measures have been very helpful. I think they have helped the banking industry, and it will certainly release some pressure on yields as well. All that is good news. Now I think we need to just watch and wait and consolidate over the remainder of the year. I am not anticipating any very deep rate cuts over the next few months at this point.

We move to the MCLR regime now and a total quantum of 150 basis points rates cuts has also been done. Do you really see investment activity picking up? As of now credit growth is still quite tepid…

That’s right, credit growth is indeed tepid and I think that is a real issue. There is always a focus on interest rates. The real underlying issue is fundamentally the private sector capex which is not taking off. That’s partly because of an over-leveraged corporate sector and partly because of the hesitancy around the global environment. There are some sector-specific bottlenecks that have opened up. So I think the focus has to be on releasing that. One area where we are likely to see positive news is growing domestic demand. Consumption is holding steady, partly because of the Pay Commission review. If you have some support from a good monsoon, you might see rural demand — which was lagging so far — pick up again. So to that extent you might see consumption-led industries at least begin an investment cycle. The other good news which has been proposed is of course the infrastructure spend that the government has announced. To the extent that you do actually see the 30 km/day of roads being built, and the State electricity boards starting to function properly and the power investment cycle reviving, that will be good. In addition to that, we are all hopeful that we will actually see the defence sector strategy starting to play out.

About the global risks, the three major factors that India is concerned about are China, oil, and the US Fed. How do you see these factors play out in terms of the Indian point of view?

The Fed will need to raise the rates at some point, which is what we need to be a little watchful of in terms of our own rate and currency policy. Because, as an emerging market, we will be continue to be very vulnerable as that cycle starts. That said, that timeline is a little unpredictable. I think it is likely some point in the summer or latest by autumn where you will see the rate cycle rising in the US. That is alongside a very uncertain US election. The global implication of that people are still struggling to understand. Of course Europe as of now has been going sideways at best for the last several months in terms of both political and economic direction. Then the risk of a Brexit is certainly not negligible by any means. Most people might expect that Britain might choose to stay — it’s a bit like the prospect of Trump getting elected in the US. In that it’s not an outrageous thought any more. Were it to happen, a Brexit certainly carries risk for the European economy and somewhat beyond Europe as well. So I think the global risks at this point are primarily centred on the way the Western world is actually conducting itself. The issue of China is of course important for India. China has an impact on global sentiment and is also an important trading partner. China has very deep-rooted structural challenges. I don’t think those are not likely to erupt in the very term. Whereas the Europe and US issues have much higher probability of short-term eruption.

China’s problems will plague the world over years if not decades. Oil I think is where it is, it is not a huge factor at this point. I think we are at a fairly stable and benign oil price right now. Anything below $50/bbl doesn’t matter to India.

As far as FY17 earnings are concerned, there are talks of a 15- 20 per cent growth. What’s your perception?

The issue is revival of demand. First and foremost much of the substance behind this forecast is entirely based on demand. And to that extent we are saying that those industries which are demand-led and consumer-led are expected to first lead the earnings revival. So hopefully you will see some of the consumer goods and some of the healthcare industries essentially start to lead the earnings revival. IT has always been somehow dependent on the how the offshore markets behave and on the currency. But we have actually seen a reasonable revival from the lows they had slumped to last year and certainly gaining more momentum from there.

And the revival in the cyclical infrastructure sector sort of depends — you may see areas such as cement lead but steels and metals might take a little longer. And banks will be a proxy to some extent for the speed at which the infrastructure and the cyclical start to revive. Any hint that they are reviving as anticipated, you will see a fairly sharp re-rating in the prospects of the banks in the later part of the year. At this point, the banks have a very significant cloud over them and I would expect that this quarter results will reflect deep cuts in their earnings.

As a domestic institutional investor, will you say that PSU banks are more value-trapped from a short to medium term time frame?

I think as people who have a fiduciary responsibility to invest for mutual fund investors, which are retail households, we of course have to take a more medium to long term view. We keep looking for conviction.

Related Topics