 "U R Bhat")
India's broader benchmark index NSE's Nifty has been oscillating between levels of 5,500 and 6,100 for long. Recent RBI's actions sent tremor waves and financial counters are paying heavy prices in the stock market. U R Bhat, managing director of Dalton Capital Advisors in a conversation with Chandan Kishore Kant says that current state of economic situation is the result of our own making and it is, probably, wrong to blame the global factors. Excerpts:
How do you see the current carnage in stock markets?
Markets had no fundamental reasons to go to levels of 6,100 which is just about 4% away from the historic peaks. Since reaching the historic peaks, there has been a significant deterioration of the economic situation in the country.
Foreign investors are generally commercial organisations and they will keep investing in India if they perceive attractive investment opportunities. Given the weak fundamentals currently, for investors to find India attractive, either there has to be a significant price correction or the fundamentals should be seen to be improving.
The global uncertain situation has slowed down the domestic Indian economy. Are we so dependent now on the outside world?
My reading is that the current domestic economic situation is quite largely a result of our own making. It has, of course, something to do with the global economic slowdown but not as much as what the government wants us to believe. Nobody asked the government to be unfair in awarding mining concessions or in land acquisitions or make a mess of the telecom industry.
Almost all the post liberalisation success stories in India in the telecom, airlines, infrastructure, steel, mining and power sectors are in shambles, largely because of inappropriate policies or regulatory confusion. All these sectors have significantly contributed to the well being of citizens and also generated sizeable revenues for the government.
The regulatory regime in telecom is in such a mess that none of the players know when they will be slapped with the next set of massive penalties that can make them virtually unviable. The courts are forced to intervene in virtually every governmental policy because of the abject ineptness in policy making in this country. Large segments of the institutional set up created by the founding fathers of the nation have been virtually driven to collapse.
Take the case of the power sector. There is a huge unmet demand for power. Power generation capacity has improved significantly. But power companies are fast going downhill. Why? Most of the raw material supply and receivables are in the hands of the government.
These companies are being throttled from both sides. On the mining front, even the companies that are implementing their concessions are being penalised.
Whether the government gave the various licenses the right way or the wrong way or whether there was contributory negligence from the companies or not, despite massive investments in these sectors - largely funded by the savings of the public - society's access to quality infrastructure and electricity is still terribly unsatisfactory.
The net result is that almost all the core industries are at a virtual standstill and as articulated above, the reasons are largely domestic.
Have RBI's recent actions spooked the stock and currency markets?
The near panic situation in the money and forex markets is perceived to be because of confusing signals from the regulator . RBI is trying to tighten money market liquidity to stem the fall in the Rupee while, it appears, they do not want to go as far as singalling a higher interest rate regime.
That's a bit of a tough job. The element of surprise is very important when trying to curtail the speculative element in markets. This is lost when a timeline is sought to be given - surprisingly from non-RBI persons in authority - for monetary action that has caused the Rupee to strengthen from 61 to 59 to the dollar.
The apparently discordant notes from the various persons in authority - both from the RBI and Government - have possibly emboldened speculators to take one-way bets against the Rupee. Market intervention should be sudden and in size such that speculators are forced to think long and hard before driving down the Rupee, if the intention is to defend it.
Any follow up statement that the monetary tightening measures are temporary or something to that effect from anyone in a position of authority is like scoring a self goal.
My feeling is that RBI is smart enough to know what needs to be done. The government and its various instrumentalities appear to be either trying to unduly influence the RBI to their line of thinking in full view of the media or they do not like the way RBI is handling the volatile situation. And that is what is being exploited by the market. They should speak in one voice.
In any case, monetary measures can only do so much in tackling the massive current account deficit and the real heavy lifting has to be done by effective governmental policies.
State-owned banks are being slaughtered on the stock exchanges. Are there any signs of bottoming out on these counters?
What is happening with public sector banks (PSBs) is, probably, bordering on over-reaction. Banks are intermediaries - they raise resources to lend and make money on the margin. Now, is there something to suggest that their resources raising capacity is severely affected? Even if resources are raised at a higher price, do they have the ability to transmit this in the pricing of their loan products? Or has lending become suddenly and irreversibly less profitable?
If the answers to these questions are in the affirmative, the stock market reaction appears excessive. In the current instance, there is certainly an increase in short-term interest rates. So, those banks which are largely dependent on short-term money market resources will be affected. But what one needs to worry about is whether they are able to transmit this.
I think the ability of these banks to pass on cost increases is quite high. If they cannot pass on cost increases fully, they would try to garner more long-term resources and try to augment their CASA deposits. It is not as if suddenly banking has gone out of fashion.
Economic slowdown would certainly affect their asset portfolios to various degrees, requiring some amount of restructuring. If this becomes very widespread, some regulatory forbearance might be needed but the extent of value destruction in the sector suggests an impending doom which is unlikely.
What is your call on the sector then?
PSBs have reached a level where it looks like as if a substantial part of their lending is suspect. That is what the market seems to think. I do not think it is that bad. There will be more stressed assets and consequent loan restructuring . But the fact is that most of the lending can be recovered given some time, so that borrowers can manage to get out of the tough times. It is unlikely that most borrowers will put their hands up and say they would not repay.
For instance, many banks have exposure to state electricity boards (SEBs). These loans have largely been restructured in a way that there is nil or minimal loss in net present value. Most SEBs are increasing tariffs.
Given some time, they would be in a position to service their borrowings. Unfortunately, the market seems to take the view that restructuring is quite largely a euphemism for write-offs. The public sector banks appear to have been beaten down based on such a view. There may be some strain on the balance sheet in the short run - may be for a couple of quarters more - but things are unlikely to go out of hand.
Foreign investors had been selling equities for sometime but now even their debt investments are on sale. How is this likely to play out?
We have been large beneficiaries of global monetary easing. There is talk of that easing being tapered off. It is not that it will be withdrawn immediately but to argue that we will remain unaffected by such tapering is futile. There is a possibility that some of this money will go back, especially if the domestic economy does not improve.
This will certainly impact markets but with the right policies, it should be possible to manage the situation. I do not think we should paint a picture of complete pessimism because our track record is that we have taken the right steps when pushed to the wall. And this time, it is unlikely to be any different.
