If the Reserve Bank of India cuts the interest rate in the third quarter review of monetary policy then it could be interpreted as less of a monetary easing cycle and more of a ‘rate cut to not affect the investment cycle’, says Sashi Krishnan, Chief Investment Officer, Birla Sun Life Insurance Company. He feels that global liquidity will find its way into countries such as India and China.
In an interview with Business Line , Krishnan, who manages an investment portfolio of Rs 22,000 crore, said that GDP growth at 5.3 per cent has bottomed out and the secular long term growth story has begun.
On global liquidity and emerging markets:
Global liquidity will still be huge in 2013 and start finding its way into risk assets — which are mainly commodities and emerging markets. Since the commodities cycle seems to be over, a lot will flow into emerging markets. Further, since Russia and Brazil are commodity-driven, money will flow into India and China.
First, the political uncertainty on leadership change is over. Second, China was going through a de-stocking (of inventory) cycle which is almost over. Now restocking will start and this will push Chinese growth. And, third, there is a dispensation in place which will push infrastructure spend, and India will automatically benefit.
From a global perspective, the US and China are fine but Europe will muddle through up to 2013-14. Therefore, with reforms support, there will be some allocations to India in terms of global equities.
On the fiscal front, we are moving closer to fiscal consolidation which is an imperative, and a roadmap needs to be made and the Government will do it. The reforms, such as setting up a National Investment Board and opening up foreign direct investment in more sectors, will help revive the investment cycle. Even if we can get 75 per cent of it, we should be there.
At a growth of 5.3 per cent of GDP, we have bottomed out. Clearly, we see 7 per cent growth next year with an improving trend which is important from a macro perspective.
Also, the immediate fallout of the twin deficits (fiscal and current account ) is that the investor sentiment has gone down. If we stick to the Fiscal Responsibility and Budget Management Act and remove subsidies, then fiscal deficit will be less of an issue.
The current account deficit (CAD) will start improving from next year onwards as the oil prices will be more or less contained. With US becoming self-dependant, speculation in the commodity will start coming down primarily because of geopolitical issues and not because of actual demand.
Further, gold imports are likely to go down with some steps. If there is global liquidity, the US will want to weaken the dollar. Hence, the other currencies will strengthen and in turn help our CAD.
On the corporate profitability and earnings, last few quarters have seen earnings downgrade. Now this cycle is over. Expectations of corporate earnings growth will increase.
Also with lot of cash surplus, companies will go for mergers and acquisitions due to good balance-sheets. Further, many companies driven by domestic demand have performed well which will be good for equity markets. Hence, I am constructive on equity markets in 2013.
On interest rate outlook:
Three factors impact interest rates:
First, the RBI view on interest rate — the Government is not doing enough on fiscal consolidation.
Second, liquidity — the liquidity deficit in the banking system has gone beyond the RBI’s comfort level of Rs 40,000-50,000 crore. The RBI’s approach in the last couple of policies has been that if interest rate cut has to get transmitted into the system, then liquidity has to correct itself. Hence, the consistent cut in CRR is a very logical step.
And, third, inflation — the latest data show that the WPI has dropped to 7.5 per cent from over 10 per cent a year ago. Therefore, with commodity prices, especially oil, coming down, imported inflation will soften. Therefore, we see inflation coming down to 7 or sub-7 per cent levels by March.
Once RBI draws comfort on the Government’s moves on the fiscal consolidation front, it will cut interest rates. But it won’t be very significant. It could be less of a monetary easing cycle but more of a ‘rate cut to not affect the investment cycle’.
Bond prices could ease from 8.20 per cent to 7.75 per cent levels by March. With a rate cut, there could be further softening in the yields.
On investment allocation:
In the past year, Indian households have been allocating more money into physical assets than into financial assets, in the 55:45 ratio, due to volatility and uncertainty in the financial markets. But this trend will reverse once the financial markets stabilise.
Asset allocation is clearly a function of the investors’ risk appetite. Those with larger risk appetite will allocate much more money into equities. The secular long-term story is only beginning.
The Sensex is just 12 per cent away from its peak. Driven by FMCG and pharma, 35 per cent of the Sensex stocks are at an all-time high. The rest 65 per cent consist of cyclicals such as infrastructure/industrial stocks which will do well if the Government takes steps to revive the economy. Hence, younger people should allocate much more to equities. In debt, we see interest rates coming down secularly and so having a part of your investments into long term fixed income makes sense.
On endowment, term policies and ULIPs:
Insurance is important for everybody’s financial plans. We have to realise that insurance is a risk mitigation mechanism which helps to cover mortality. Insurance generally offers both investment and protection needs. In the current lifestyle, as much as we need protection, we also need investments as well and depending on the needs we help out the customers choose their asset allocation.