Govt unlikely to choose fiscal profligacy: Elara Capital CEO Raj Bhatt

“You will not lose money if you take a medium-to-long-term view of India. But in the short term, I am not comfortable, as the current rally is purely liquidity-driven,” observes RAJ BHATT, chairman and chief executive officer of Elara Capital. In an interview with Sundar Sethuraman, Bhatt says India stands out globally because of its financial discipline. Edited excerpts:

India has seen the return of coalition governments after 10 years. Will this change economic policy and impact markets?

The government should be more effective with slightly fewer seats. Consensus building becomes more challenging when more parties are in the coalition. 

The present regime is a more stable coalition, and their allies have previously worked with them and collaborated with the ruling party in their respective states. 

Your expectations from the Budget?

We have Assembly elections coming up. This time, they must win because of the coalition nature of this government. However, the government is unlikely to choose fiscal profligacy. 

Right now, even developed countries have high fiscal deficits, whether in the US or Europe. We are standing out because of our financial discipline.

We have seen foreign portfolio investors (FPIs) sell immediately after elections. Now, they are becoming net buyers again. Do you see FPI inflows continuing?

FPI flows are not very significant now because domestic flows outweigh them. Markets no longer correct significantly when FPIs sell. The potential for FPI inflows is huge, but we still have a lot of capital controls. 

A lot of regulatory requirements need to be met. Many people are talking about investing in India. But that requires a lot of regulatory changes. And then we also do not have much paper to absorb all the available liquidity. 

We are now getting $100 billion companies in India, and the US has $3 trillion companies. In the US, promoters don’t account for more than 20 per cent stake.

What are the concerns of international investors about India at this point? 

The only concern is easy access to the market.  They are buying (India-focused) exchange-traded funds in the US. Many investors are investing through index funds abroad, which are not true replicas of the market, regardless of whichever way they do it.

Is there any immediate regulatory change that will make it easier for FPIs to invest in India?

Disclosure norms can be relaxed. Many investors don’t like to disclose their ownership. The second is the access point. FPI registration is faster now. However, some people are not comfortable setting up funds in Mauritius. If they have funds in the US, they would prefer to buy directly.

Do you see markets rallying further? 

Valuations are rich, but they are rich globally. They are much richer in the West, particularly in the US. 

You will not lose money if you take a medium-to-long-term view of India. But in the short term, I am not comfortable. And I’m talking about proprietary investments — funds we must invest anyway.

On the proprietary side, we are mostly in bonds right now. We have some concentrated bets in South America and China. In India, it’s a momentum play as the markets have run up quite a bit. It can go 10 per cent more, but it’s all purely liquidity-driven.

Will FPI flow shift to a resurgent China and cheaper emerging market peers?

China’s prices are depressed, and valuations are very low. The only risk regarding China is geopolitical.

People are looking at growth in India, and they don't mind paying higher price-to-earnings (P/E) multiples. Growth commands high P/Es, and sometimes sentiment drives the market.