Markets can correct up to 15% from current level: IIFL chairman Nirmal Jain

Jain says long-term outlook for the Indian economy and markets is undoubtedly very positive and the country's rise is unstoppable

Besides global developments, markets are now eyeing the outcome of the Assembly election in Karnataka scheduled for May 2018. Nirmal Jain, founder and chairman of IIFL Group, in conversation with Puneet Wadhwa and Vishal Chhabria said he expected the markets to remain volatile, as they have the curiosity to assess election outcomes in advance. Edited excerpts:
 
How are you interpreting the fall in markets from the peak levels?
 
At this point, I would like to believe it was just a much-needed correction. When the markets run up sharply, even a small event can trigger a fall. That’s the nature of the market. One cannot expect them to be on an uptrend and stay at elevated levels for long. A correction was due. Now, macro variables have turned negative. People were very gung-ho about India’s macro fundamentals. The fact is that a few things have gone adverse.
 
Interest rates in the US have started moving up. This will put pressure on global markets. In India as well, the Reserve Bank of India (RBI) has been hawkish. High interest rate is not good for the economy. I do understand imperatives of keeping inflation under check. The unfortunate thing is for a country like India, theoretical model of raising interest rate to keep inflation under check does not work. For instance, food inflation has no effect of higher interest rate. On the other hand, very high real interest rate hurts investment and job growth.
 
Do you think the recent bank scam has hurt the sentiment?
 
That apart, we have a peculiar problem where media assumes role of investigating, passing the judgement and execution as well. The political leaders and regulators pay too much attention to trial by media and in an attempt to justify their case, send wrong signals to the system. All this is hurting the banking sector.
 
The Indian economy is in a growth phase; finance and banking are its lifeblood. If at that time the PSU banking sector gets paralysed, it will affect growth. This will have a cascading effect on the road ahead for the economy. Policymakers need to take action urgently and ensure that favourable macro variables do not get negated.
 
What is the long-term outlook for the Indian economy and markets?
 
It is undoubtedly very positive and strong. India’s rise is unstoppable. The most favourable factor in India is the demographics. The millennials (aged between 18 years and 36 years) are around 34 per cent of the population, but comprise 60 per cent of the workforce and 70 per cent of household income. This segment is growing rapidly. Against this backdrop, the economy is poised to grow well over the next few years.
 
The government has initiated a slew of reforms with good intent such as the implementation of the goods and services tax. They can have a positive effect if they are not derailed or cut short. The crackdown on shell companies has reduced cash and black money component in the economy. The government is now linking Aadhaar and permanent account number, which if continues, will have a complete trail of transactions. All this augurs well for the economy. When the money comes through formal channels, it can create jobs.
 
What is the worst we can see on the Nifty/Sensex over the next one year?
 
I can’t do crystal ball gazing. We can talk about probabilities. The markets had a meteoric rise in 2017. From the current levels, markets can correct by 5-15 per cent. In fact, broader market indices will find support after 5-10 per cent correction, the mid-and small-caps can correct more sharply. The trigger events can be unfavourable outcome for central government in Karnataka elections, the US-China trade war getting nastier and geopolitical tensions, among others.
 
What’s your take on how the political landscape is changing and its effect on markets over the next few months?
 
Outcome of the Assembly elections in Uttar Pradesh and Maharashtra, lower-than-expected margin of victory in Gujarat and the outcome of recent by-polls indicate the polarised nature of elections and importance of alliance equation in the polls. All this indicates that the government could be forced to take aggressive populist decisions. Or, if there is a coalition government, these reforms can be derailed. Markets will always have a curiosity to try and assess these things in advance. All this will keep them choppy. Political and macro environment is not as good as it was.
 
Will the confidence of retail investors get shaken over the next one year due to forthcoming elections?
 
We have a big political event coming up, which is the election. There can be intermittent corrections, but we do not expect a sharp fall unless there is a big event that can trigger it.

Do you expect aggressive consolidation among PSU banks?

The ~2.11-trillion allocated towards recapitalisation has evaporated quickly. Recapitalisation cannot continue like this. The government lacks political courage to denationalise PSU banks at this time. Today nobody thinks that bank privatisation is politically feasible. India has a track record of making revolutionary policy changes only when pushed to the brink. We remember how licence raj was dismantled overnight in 1991. But today, I agree bank privatisation will not be on the government’s agenda till 2019 general elections.