Motilal Oswal, chairman of the diversified financial services company bearing his name, explains to Puneet Wadhwa why he’s rather optimistic on the Indian and global economic and equities’ outlook in the coming months. Edited excerpts:
Many key events have unfolded over the past few days, such as the Cash Reserve Ratio (CRR) cut by the Reserve Bank of India (RBI), the monetary policy review, the Economic Survey and the Union Budget. What’s your interpretation of the announcements?
The liquidity deficit has been rectified by reduction of the CRR, which infused Rs 48,000 crore into the system. This deficit should come down to one per cent of net demand and time liabilities (NDTL) by April, once the government starts spending again.
The key message RBI wanted to convey in the monetary policy review was to see the fiscal consolidation exercise undertaken in the Union Budget in FY13 before embarking on rate cuts. Their statements after the Budget seem to suggest they are somewhat satisfied with the revenue enhancement steps. My sense is that policy rate cuts will begin in April and, henceforth, growth will have precedence over inflation for the central bank.
On the other hand, the Economic Survey has painted the economy’s ground realities. The Budget has attempted to do whatever the FM (finance minister) could in a politically difficult environment. The numbers presented in the Budget are, however, believable and achievable, in sharp contrast to the case in 2011-12. Infact, service tax collections could surprise positively than what has been budgeted, and with some oil subsidy rationalisation which I certainly expect after realignment of some political equations at the Centre, could ensure we undershoot the fiscal deficit target of 5.1 per cent.
Has the Budget laid a good foundation for fiscal consolidation and the RBI to look at rate cuts ahead?
Yes, I think RBI would have precedence of growth over inflation and would undertake policy rate cuts from April. This is predicated on the belief that $125/barrel for crude oil does not reflect the demand and supply. A lot of geopolitical risk premium is built into this $125 figure, which could correct as fast as it has risen. The US is not in the same position to rage a war against Iran, unlike the Gulf War in 1992 or the war against Afghanistan after 9/11. It is much weaker financially than at that time.
Do you expect foreign institutional investors (FIIs) to continue pumping money into Indian equities, given the state of the economy, recent statements by the RBI and the Budget proposals?
If you look at the break-up of the money that has come into India this calendar year (2012) by way of FII investment, the bulk has been through Asia ex-Japan funds and Global Emerging Market funds. Essentially, they have gone equal weight on India vis-à-vis the underweight position earlier. I don’t expect this to get reversed so quickly, as FIIs as a whole have discounted the policy paralysis and lack of reforms from this government to a large extent. If anything, flows can surprise on the positive side in the second half of this year.
Resource mobilisation through the initial public offer (IPO) route saw a massive fall during FY12 (till December 2011), the Survey suggested. ONGC’s share auction met with a tepid response, though MCX gave some revival hope for primary markets. How do you read these?
The Rajiv Gandhi Equity Scheme announced in the Budget should be a good success. In all probability, a lot of long-term retail money should flow to capital markets, thereby reducing volatility. This should help the cause of disinvestment and IPO mobilisation as well. The current problem of the equity markets is a crisis of confidence and nothing else, which should get addressed first. Everything else falls into place automatically.
What is your outlook for the Indian equity markets? Can high crude oil prices spoil the party? Which sectors/themes /stocks are you betting on?
I remain positive on the equity markets .The markets are absorbing all the bad news without falling. When the cycle of good news start, it would simply explode. One must understand that earnings have gone up 50 per cent in the past three years and markets are still down 15 per cent from the peak. And, this on the back of the strong liquidity sloshing around in the world system.
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I would be overweight on infrastructure, capital goods, banks, autos, and real estate. And, underweight on consumer staples, pharmaceuticals and information technology.
How do you see corporate earnings in 2012-13? Do you expect the pressure on margins to continue? Which sectors/companies performance will still be better off in FY13 as compared to FY12?
There will be pressure on margins for consumer staples. At best, they can remain stable and valuations are rich for this sector. The Sensex earnings should be in the vicinity of Rs 1,250, with an upside risk making valuations reasonable.
How do you see bond yields and the rupee in the near-to-medium term?
I expect the rupee to be in the region of Rs 54-55 by March 2013.