The latest CRR cut is expected to inject Rs 48,000 crore of liquidity into the banking system. The actual easing would start when RBI reduces the repo rates, Piyush Surana, CEO, Daiwa Asset Management, tells Puneet Wadhwa. Edited excerpts:
Was the 75 basis points cut in the the cash reserve ratio (CRR) expected? What more can one expect from the central bank in the coming monetary policy review?
This cut in the Cash Reserve Ratio (CRR) is expected to inject Rs 48,000 crore of liquidity into the system. The cut was imminent considering the rising short-term market rates and to address the expected increase in liquidity deficit during second week of March due to advance tax outflows.
Unless the capital inflow trend improves significantly, inter-bank liquidity could tighten again from May or June, thereby warranting more cuts. The actual easing of monetary policy would start when RBI reduces repo rates. This we believe will happen after the inflation rate has remained at comfortably low levels for a while.
The recent rally in oil prices could delay this easing. The extent of the cuts will depend on the trajectory of oil and other commodity prices, and the fiscal consolidation measures announced in the Budget.
Our markets are yet to scale back to the 2008-highs. Do you expect the Sensex/Nifty to surpass those levels in FY13?
Our market, as represented by the Sensex, currently trades at 13.5 times one-year forward estimated earnings, which is below long-term trading averages. At current levels, a significant degree of safety margin exists for investors willing to ride out the current uncertain times. We believe the pace of earnings growth should accelerate.
Besides this, the large expansion projects undertaken by many companies are coming on stream now. This should result in a gradual lowering of interest burden, a process assisted by an easier monetary policy stance. Consequently, equity markets should deliver steady appreciation from here on, allowing investors to get attractive returns over the next two–three years.
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What is your assessment of the news flows from the euro zone, especially Greece?
The scale of Greece’s restructuring is large in absolute terms, and this could set a precedent for further restructuring of other European countries on the continent’s periphery. During the last quarter of 2011, markets across the world were worried about the contagion effects of the sovereign crises.
The European Central Bank’s long-term refinance operation (LTRO) has calmed markets substantially and the major threats to market stability seem to have been addressed.
China has cut growth target for 2012 to an eight-year low of 7.5 per cent. What will be the likely impact of this on the global equity and commodity markets?
China has been at the forefront of global growth for two decades and its pace of growth has been extremely brisk. It is inevitable such a pace is unlikely to sustain over the next couple of decades, and a gradual easing is natural.
Commodity prices are heavily dependent on Chinese growth, as developed markets are unlikely to cause a spurt in demand for raw material. Hence, prices are likely to remain subdued. Easing of supply-side constraints could cause an easing off in the price of crude oil as well, which will be beneficial for India.
Although a growth rate of 7.5 per cent is lower than its recent achievements, at the current base it is a substantial increase. Other emerging markets, including India, are expected to exert increased pressure in terms of commodity–related demand in future. Commodity prices are unlikely, therefore, to remain subdued for long.
What is your reaction to the Assembly poll results? Do you see mid-term polls becoming a reality? Have the markets digested this fact?
In our view, the likelihood of mid-term polls is remote, as the interested political parties seem unable to secure the requisite numbers to force this event. The equity markets were disappointed the Assembly elections did not result in strengthening of the ruling coalition. The markets appear to have accepted this fact, but will remain volatile ahead of the Union Budget and the credit policy announcements.
What is your investment strategy at Daiwa under current market conditions? Which sectors/themes, according to you, still offer value from a medium-term perspective? Can you highlight some fundamental stories within these sectors/themes?
We are positive on interest rate-sensitive sectors, power and non-ferrous metals. We are optimistic on the prospects of information technology (IT) and have a favourable disposition towards companies in the agri-related space and textiles. We are also optimistic about prospects of the FMCG sector. However, the current valuations constrain us from expecting a large out-performance from this sector.
Do you think the Budget’s proposals will be populist? What are your expectations?
The finance minister will have to balance the requirements of containing the deficit within reasonable bounds, while staying within the constraints imposed upon him due to political compulsions.
We believe the government will use this opportunity to table a growth–oriented Budget that will contain steps to boost investment climate in the country. The current fiscal position does not allow too much leeway to the government to enact populist measures. A redeeming feature of the last few elections has been the rising aspirations of the populace in terms of more concrete steps towards development. We believe the ruling coalition realises this and will utilise this to remove bureaucratic impediments stalling large projects, an exercise which will be visible outside of the Union Budget.