RBI deputy governor R Gandhi calls for more green funding

Reserve Bank Deputy Governor R Gandhi said incorporating environmental concerns into commercial lending is a challenge in a country like India.

“The challenge before developing economies like ours is to mainstream green finances, so as to incorporate environmental impact into commercial lending, while imultaneously balancing the needs to economic growth and social development,” he said at a conference on sustainable finance here.

“We have to develop the instruments. We have to balance out the green development and economic development,” he said speaking to the reporters later.

The new priority sector lending requirements announced by the RBI include devoting money to social infrastructure and small renewable projects, which will help support the objective of sustainability finance, he said.

The central bank also has been working on various other aspects, he said, adding a working group has been formed to look into it.

Additionally, the Securities and Exchange Board of India (Sebi) has also worked out norms for raising money through green bonds, through which domestic financial institutions.

Investigative agencies have ability to find money trail: Sinha

Amid controversy over alleged corruption in Rs 3,600-crore AgustaWestland VVIP chopper deal, Minister of State for Finance Jayant Sinha today said investigators have the ability to find the money trail and the government will pursue the matter for citizens’ benefit.

“These are investigations that our agencies are undertaking and they are very capable,” Sinha said in response to a question on how confident the government is in proving the money trail to Sonia Gandhi or if it is just a political aggression.

“They (investigative agencies) have the ability to be able to track down and find out what the money trail is. Of course, we will pursue the matter for the benefit of citizens of the country, wherever the investigation, wherever the evidence may take us,” he said on the sidelines of the Enforcement Directorate Day here.

The ruling BJP has been making allegations of involvement of top leaders of the Congress in the chopper deal.

The VVIP chopper deal relates to a 2010 decision of the the UPA government to buy 12 helicopters from Italian manufacturer, Finmeccanica, a unit of AgustaWestland.

CBI, in 2013, had registered a case in connection with alleged bribes paid by the firm to Indians to clinch the deal for 12 helicopters to ferry VVIPs, including the President and the Prime Minister.

With regard to the Rs 9,000-crore loan default case involving Vijay Mallya, Sinha said these are commercial matters and banks are pursuing these cases.

“It is obviously for them as well as as investigative agencies that are pursuing cases against Mallya. We have a very robust as well as a very independent process both on the commercial side as well as on the investigative side,” he said.

Asked if Mallya would be deported to India for prosecution, Sinha replied, “These are government to government matters that have to resolved taking into account laws of both the countries. We have made filing with respect to Mallya and we have to proceed as per the law.” Earlier this week, India asked the UK to deport Mallya, whose Kingfisher Airlines has been accused of loan default, citing the revocation of his passport and a non-bailable warrant against him.

India offers $100 million for infrastructure fund to PNG

Seeking to strengthen bilateral ties and ensuring energy security, India today offered a USD 100 million line of credit for development of infrastructure in Papua New Guinea (PNG) and agreed to jointly develop new avenues of cooperation to explore and develop the Pacific nation’s vast oil and gas resources.

India, during a meeting between visiting President Pranab Mukherjee with his PNG counterpart Sir Michael Ogio, also offered a coastal surveillance radar system and Coast Guard patrol vessels to the country as part of its commitment for the mutual maritime security initiative.

After the completion of the maiden two-day visit to PNG by President Mukherjee, the two sides in a joint statement highlighted various international and regional issues including terrorism, India’s candidature for permanent membership of the UN Security Council and maritime security.

The two sides agreed to establish a mechanism for regular consultations between the foreign ministries of both countries aimed at diversifying bilateral cooperation in areas of shared interest.

“Keeping in view India’s desire to achieve energy security, PNG agreed to develop new avenues of cooperation with India in exploration and development of Papua New Guinea’s vast oil and gas resources through joint ventures and Indian public and private sector investment in new and existing projects,” the joint statement said.

A deal for extending an Indian line of credit of USD 100 million for development of infrastructure in PNG was also signed.

PNG announced a visa-on-arrival facility for Indian tourists travelling to the Pacific Island as a “gesture of reciprocity” as India has already approved a similar facility for the nationals of all Pacific Island countries since last year.

India also announced providing retro-viral drugs and equipment for the treatment of 20,000 HIV patients in PNG for a period of one year.

Both leaders also witnessed signing of the Memorandums of Understanding on agriculture research cooperation between University of Technology in Lae in PNG and the Indian Council of Agricultural Research (ICAR).

The two sides finalised and signed a MOU for broad ranging cooperation in the health sector.

50% of smaller firms not paying taxes: Government

Fifty percent of the smaller firms are not paying taxes and the government is keeping a tab on such entities to ensure there is no tax evasion,” the Lok Sabha was informed today.

Minister of State for Finance Jayant Sinha said the government has taken “revolutionary steps” to ensure there is no tax evasion and steps have been taken to increase tax collection.

Things have improved as far as prevention of tax evasion is concerned, he said while replying to questions.

Referring to smaller firms, Sinha said 50 percent of them do not pay taxes and the government is keeping a watch to ensure there is no evasion.

To ensure compliance, stringent action is being taken, he said.

The minister said there are 25 crore households in the country, out of which 18 crore are in the rural areas.

Out of the seven crore households in the urban areas, nearly half cannot pay tax and the total eligible households who come under the tax net are between four to six crore.

To a query on people trying to evade taxes by showing their income as ‘agriculture income’, Sinha said the scope of such evasion is less.

Responding to a supplementary on recommendations made by the Special Investigation Team (SIT) on black money, the minister said a series of recommendations have been received and the government has benefitted greatly by the suggestions of the SIT.

HCL Tech Q3 below estimates; net up 0.3%, $ revenue up 1.3%

HCL Tech   has disappointed the street with its January-March quarter results. It posted Q3 net profit at Rs 1926 crore up 0.3 percent from Rs 1920 crore in last quarter. Rupee revenue climbed 3.4 percent at Rs 10698 crore against Rs 10341 core on sequential basis. In dollar terms, revenue was up 1.3 percent at USD 1587 million against USD 1566.1 million quarter-on-quarter.

According to a CNBC-TV18 poll, HCL Tech’s net profit was  expected at Rs 1963 crore, down 2.2 percent in January-March quarter. Dollar revenue was seen up 2.5 percent at USD 1604.5 million in Q3FY16 and rupee revenue was seen at Rs 10805 crore. Constant currency growth in Q3FY16 is seen at 3 percent.

In constant currency terms, revenue grew 1.7 percent (QoQ). During the period, utilisation was at 85.6 percent versus 84.7 percent (QoQ). Attrition increased to 17.3 percent against 16.7 (QoQ).

Regionwise, Amercia business grew 3.7 percent, rest of the world rose 1.3 percent but Europe slipped 2.4 percent (QoQ).

Shiv Nadar, Chairman & Chief Strategy Officer says, “A new set of 21st century enterprises are emerging, posing a threat to the dominance of traditional leaders. These 21st century enterprises are experience centric, services oriented, agile, lean and ecosystem driven. The market is undergoing a tectonic shift as sales and earnings of blue chip majors are under pressure, while average life spans are declining.”

For the full year, its net profit was at Rs 7354 crore up 0.7 percent while revenue jumped 14.6 percent at Rs 40913 crore. In dollar terms, revenue was up 7.1 percent at USD 6235 million. Revenue growth in constant currency stood at 11.6 percent (YoY) in FY16.

It has announced dividend of Rs 6 per share.

India a good structural bet, but not immune to risks: BofA-ML

India is completely correlated with emerging markets (EMs) globally, says Sanjay Mookim, Director-India Equity Strategy at Bank of America Merrill Lynch (BofA-ML), adding that increased volatility in EMs will affect the Indian market.

BofA-ML has upgraded its outlook on EMs on a structural basis, but continues to be underweight on India. “In the next 4-5 years, EMs could reverse their underperformance trend,” he said.

“India remains a structural safe bet,” he said. The economy is now showing signs of improvement. In the next three-four years, economic growth will accelerate, he added.

Despite this, Mookim said, downside risks cannot be avoided. EMs could give up huge rallies on back of some negative commentary or volatility in commodities.

Money inflows, visible in the last few weeks, are mostly short-term in nature and could come down if global volatility increases.

In India, investors are now struggling to find ideas and the midcap space looks rather expensive, he added.

BoML is bullish on pharmaceutical companies. There is regulatory overhang, but some largecap pharma companies will deliver positive earnings a few years down the line, he said.

Sonia: The run has been very good for the Indian markets but the overhang continues to be on the global volatility. Today we saw the BoJ policy where they forecast absolutely no growth for Japan in the next two years, do you think that could come back to haunt emerging markets or are we insulated from the global slowdown?

A: I don’t think we are insulated in anyway. In fact, if you look at the evidence on the indices and on the front flows, we have highlighted this previously, Indian markets are now 80-90 percent correlated with emerging markets. So if there is increased volatility in the EMs because of whatever any of the Central Banks might be doing and the EM basket were to fall or move up, I think India would do that as well. There is nothing in the near-term that suggests that India will decouple in itself.

Latha: What is your reading of the global markets? We have seen a return of interest in emerging markets, return of flows in emerging markets, two major Central Banks have pronounced today and the Asian Markets are not all that rattled barring Nikkei, should we believe that the risk appetite towards EMs continue?

A: As a house, we have upgraded our outlook on EMs on a structural basis. So we have said there has been trouble for the last five years. Many of the factors, which have dragged EM performance for bottom up perspective are probably as low as they could get and therefore, we think that for the next four-five year period on a structural basis, EM should reverse their underperformance trend.

However, having said that does not mean that near-term volatility or risks to the downside can be avoided and should you get any sort of a hawkish statement, if you get a dollar strength or any reversal of the commodities complex, I suspect that EMs could give up some of the huge rally that we have seen from the bottom in the short-term.

Sonia: What kind of money have you seen enter into the Indian markets from the foreign institutional investors (FIIs) community? Is it a lot of the long-only funds or is it some of the hot money as we call it that has been pumped in and what do you expect to see over the next three-six months?

A: Our understanding is that much of the money has been passive money. I don’t know if you call it hot or cold but it is more ETFs and future sort of driven flow that has driven and this is again going back to the earlier argument that it is correlated with an EM sentiment and therefore it is more allocation driven rather than long only basis. That could be more short-term in nature and if you see a reversal in sentiment that money could flow out relatively easy.

Latha: How does India stack up in the EM basket?

A: From an EM perspective, as a house, we have an underweight on India because we think that given the worse of expectations in some other countries, you might expect greater rally given our bullish view on the EM basket. However, my personal opinion is that India remains a structural safe growth bet in the EM context and as a result it will remain a core holding for most investors.

To my mind, it is not something where you worry about huge downsides or huge risks if you were an investor. There are the increasing signs that Indian economy is improving from a relatively weak FY15 many. So on a three-four year basis, I think the economic growth should accelerate.

Bullish EMs near term; good time to get into banks: JP Morgan

India is an underperformer in the context of emerging markets despite having rallied alongside peers since March, Sunil Garg, Head of International Resrach, JP Morgan, tells CNBC-TV18.

He is bullish on emerging markets, particularly Brazil and Russia, in the short term. But he is not sure if the fundamentals will support the rally beyond the next three months.

On India, Garg says a good strategy would be to focus on companies which stand to gain from domestic opportunities as India’s economic cycle is turning for the better.

He is bullish on banks and feels the sector will outperform tech in the near term.Latha: First the interpretation of Bank of Japans’ (BoJ) decisions. It has left the Nikkei tottering but India looks un-impacted, how should you read it as an Indian investor?

A: There are two Central Banks globally, which have been toying unconventional monetary policy, that is European Central Bank (ECB) and the BoJ. We have seen the currencies have strengthened so we have seen sell off in some of the markets particularly Japan.

The EM story is a lot different and that applies to some extent to India as well. EMs have been outperforming and a lot of that is going to boil down to the fact that we have been in a very weak earning cycle across EMs and in India for many years and as we get some confidence, the market marches to those tunes rather than worrying about the presence or absence of monetary stimulus in other countries.

Sonia: We have got repeated bouts of global volatility in the last 12 months. What should the long-term investor orientation be? Should you use every opportunity to buy into that dip if it plays out?

A: The volatility has definitely been elevated and you could argue from exceptionally low levels and it has been driven in parts by policy intervention. I think we have seen that in China driving some of the policy driven volatility both in summer last year in January this year and that has played a big role.

I think the other part, which has been extremely critical is the role of currencies particularly emerging markets. If you look at over the last couple of years directionally, it is probably the single largest thing that has been impacting emerging market equities and as we have seen some policy actions whether it is the unconventional monetary policy actions taken by some Central Banks or some policy interventions by China or the impact of commodities, the currencies has become very central. That has caused a lot more volatility.

You could also argue that countries such as India where the currency has been a lot more stable than to what you have seen in many other emerging markets have benefited. They have been a safe haven in defensive through this currency volatility. So to some extent, having a currency that doesn’t move around as much has provided India with a bit of a defensiveness particularly late last year when we were seeing volatility in the market.

So I think where we go from here, the currency and commodity complex is still going to be a pretty big factor in driving what we see as volatility. I cannot comment on where the policy actions might go because that is a difficult thing to call.

Latha: How are you looking at levels in India at this point in time? It has been a decent 13.5 percent rally in the past month and a half to be precise from February 29. At this moment, do the Indian markets look fully valued or will you still look for value in some pockets, midcaps?

A: Before I get to the specifics in terms of sectors, do note that pretty much every market in the world had a panic sell off at the beginning of the year for about six-seven weeks and then recede a reasonably sharp rally across every global equity market. I think the emerging market had delivered a pretty healthy outperformance. What is interesting is that India is an underperformer in the EM context of year-to-date (YTD) as is China and these are the markets which were somewhat more stable particularly India, they were outperforming because India did have the currency gyrations as we had in some of the places.

So to some extent, let us be clear that India has been an underperformer although the market has rallied. I think a lot of the rally that we got both in absolute and relative terms was just more from the reduction of panic. Where do we go from here is going to depend on are the fundamentals now justifying what the markets have done and that is going to get down to earnings.

We have definitely started to see a pick up in the earnings trajectory in India. Earnings have been a very disappointing feature in the Indian market for the last couple of years. We have started to see a bit of a better outcome in this earning season.

So at an overall level, that is what is going to either sustain or not sustain the performance. I would think that you have to be looking at domestic opportunities simply because the cycle is very favourable in India. We haven’t been able to see that translate into earnings but one has to be looking at opportunities which are focused on the domestic market be it in the midcap space, be it in the largecap space, I would focus on domestic growth sectors as probably the place to be in.

Sonia: Because of these two reasons you alluded to, a concrete pick up that we are seeing in some pockets in earnings and two the fact that India has perhaps scope for more of an upside because it has underperformed in the past, would you expect to see the Indian markets hit a new high by the end of 2016?

A: I would stay long emerging markets at this point in the very short-term. There are other emerging markets, which probably have a bigger outperformance largely because of the commodity strength and the currency movements that you are seeing. So you are clearly seeing Brazil and Russia outperforming at least in the short-term you probably have some more tailwinds. Can we get the fundamentals sustain for those markets? It is still not a proven fact. I think cyclically, India is one of the best positioned emerging markets. I don’t think there can be much doubt about that and from that perspective, yes the bias would be that we will be higher. Are we going to be at a record high or not? Difficult to call still a long way to the end of the year but I would be long emerging markets at this point.

Latha: Typical way to play the domestic sectors would be banks and non-banks perhaps, what do you like in that space if any?

A: I think the banks are definitely interesting. The classic way to look at banks is that — you want to buy banks at an early cyclical stage because the cycle is going to improve asset quality. So clearly people have concerns on the asset quality on a legacy basis and there is no denying that but a rising cycle will help improve the balance sheet structurally it will help improve asset growth and that is a pretty powerful combination of what that does to banker. That is a classic way to be playing the banks. So look for opportunities for growth.

I think you do need a rate cutting cycle to be sustained to probably be more in the NBFC space if you like. I do think the bank valuations are cheap so there is huge opportunity in that space. So I do think that financials cyclically are good place to be in at the moment in India.

Sonia: What about IT stocks because if you leave Infosys   aside, it has been a pretty lacklustre quarter for the entire sector, HCL Tech   was poor, so was Wipro   , TCS   did nothing much, what do you do with that space?

A: I think you definitely don’t have a lot of — at least on a delta basis the currency helping you in that space either. So my bias is definitely to be playing more domestic sectors, we definitely have energy that looks attractive, banks that look attractive probably some of the consumer discretionary names that will look attractive. So I think there is definitely a lot of other spaces that you can be relative to IT and I do think that banks will probably outperform technology at this point.

Latha: Overall would you remain positive on EMs at least in the next quarter or so?

A: We have been positive on EMs now for some months on both and absolute relative basis and I do think that this continues. Let us just be mindful of a couple of things. I think currencies have played a role in this movement up. So if you were to get sharp spikes in the dollar, I do think that runs a bit of a risk for EM. At this point we would be overweight and we would be long in absolute terms in the EM space.

Market to take cues from BoJ meet; like agri, pvt banks:Ambit

It has been a phenomenal two months for the markets, says Vaibhav Sanghavi, MD Of Ambit Investment.

Going forward, the market will take its cues from the Bank of Japan meeting lined up on Thursday. The future course of the US dollar, yen and the euro will depend on this as well as the US Fed meet, says Sanghavi.

The banking space has rallied in the last two months helped largely by disclosures of bad loans. Both the Reserve Bank of India and the government have been taking positive steps to ensure there is more transparency.

“But the pain is not over yet for banks. It will last for two quarters at least,” he said.

He is bullish on the consumption theme which has been driving the auto space. The rural segement, particularly farm equipment and agrochemicals, will also get a thumbs-up.

If investors can live with the beta (high volatility) nature of midcaps, then she can expect greater returns in the long-term, says Sanghavi. He is upbeat on private banks and select NBFCs.

Latha: There is this rally which came out of nowhere, has it got legs?

A: Just to take into perspective, it has been a phenomenal two month performance of the market and now we are for the year-to-date (YTD) 1.3 percent up already. This move has got everybody by a little surprise. So, going forward whether this rally has legs or not, there are quite a few monetary bills which one has to look at before deciding onto what will happen probably.

One is today Bank of Japan (BoJ) and FOMC meet this week which will determine the course of the performance of dollar, yen and euro. At the same time, the incremental steps which are coming from China. China, if you see the data in March, it has been very good in terms of trade date or probably whatever the economic data has been and that has fueled the global market rally.

However, what is worrying is basically, largest amount of account openings again in commodity space where commodity speculation has already begun on a large scale at least in China. So, there are again some kind of asset bubbles probably happening on those kind of sprint so do have a look at all those variables. In the medium-term, I think this momentum may continue; it is anybody’s guess actually.

Sonia: You are advising retail investors to continue buying into this market?

A: As I say, it is a very tricky market. The number of variables at this point in time do support that momentum however any further worries from the global front would stop probably this rally. I don’t know whether retail investor will be able to cope up with those kind of variables which may emanate from the global scene.

Latha: How did you look at the Axis Bank numbers and therefore the entire banking stock; that one has rallied harder than the Nifty?

A: The whole banking space has rallied very hard in last one and half to two months in anticipation that larger part of the problem is out and larger part of the disclosures have been through so that people start looking at the price to book rather than price to adjusted book and there is much more transparency in what you are probably going and investing into, So, in that sense, it is pretty okay.

Incrementally government and Reserve Bank of India (RBI) both on a combined basis have been taking positive steps on the sector for the longer term basis. However, if you ask me whether the pain has been over as of yet? No, I don’t think so. I think it will sustain for couple of quarters more. Having said that these stocks have rallied a bit, I think it will be time for them to cool off a little bit and switch to quality again.

Latha: Switch to quality within banks?

A: Within banks also.

Sonia: The other good set of numbers that we had was from some of the auto stocks like Maruti Suzuki   . That just tells you that the consumption trend is picking up, is that a theme that you would play now?

A: Absolutely and we are pretty much overweight on the whole consumption theme including consumer discretionary. Though we have shifted from four wheelers to two wheelers and that has been our stance for last couple of quarters, we are also bullish on consumer durables and we are also bullish on anything to do with the rural segment including farm equipment, agro chemicals.

Latha: Would you say that midcaps are the place to be in?

A: Midcaps by nature are little bit of high beta and they are not caught up as yet. If you see the longer term story of India, I think they are pretty much on a growth path. So if an investor probably for a longer term basis is willing to live with the volatility and the beta nature of the whole segment, I think midcaps will offer on a longer term perspective better returns, no doubt about it. So, it is just a matter of time horizon where you are looking for.

Latha: I wanted to ask you, yesterday the Call writers actually got wiped out because that rally came out of nowhere. So, for the immediate term, this contract itself, do you think that higher side is more likely?

A: The maximum open interest I think is around 8,000 levels currently and it will be tough for the market to cross 8,000 and if it crosses 8,000 you will see some amount of delta buying happening by sheer amount of Call which have been written on 8,000. The expiry should be relatively strong. I don’t think it has much of a downside from 7,800 to be very honest.

Latha: So this contract is safe?

A: This contract is looking safe.

Sonia: You told us about a couple of themes that you are looking at now. One of them is the consumption theme in sectors like autos. Anything else that you are playing that you would be advising investors to buy into, maybe something like IT?

A: IT is pretty much at the bottom up story for us in the sense that we are continuously saying that it will be business which you would want to buy which has a differentiated offering and high value added offering rather than the commoditised business which generally is currently in terms of IT space. The IT space in terms of the PE multiples and the growth which we are seeing, will offer some amount of bottom up stock picking rather than having each and every stock in the basket of IT. So, we are pretty selective in IT at present.

Latha: So you are top-down only in consumption stocks?

A: Yes, consumption as I said led by again consumer discretionary, paints, consumer durables and two wheelers.

Latha: No finance stocks?

A: Finance yes, private banks and select non-banking financial companies (NBFCs).

Latha: What about in the Biocon, Syngene numbers, Biocon in particular looked good?

A: It is a pretty niche story and with a good option value actually on to the stock. We don’t think that the valuations are very expensive so it has legs to go, both Biocon   and Syngene .

Expect 60% of ‘watch list’ accounts to turn bad: Axis Bank

Axis Bank   has prepared a “watch list” of about Rs 22,000 crore worth of loans, or 4 percent of its total assets, out of which 60 percent might go bad in the next couple of quarters, said V Srinivasan, Deputy MD of Axis Bank to CNBC-TV18.

Srinivasan added that the bank has assessed the status of the corporates, their current payment track record, their fundamentals, and the probability of the slippages, before taking a call on making the watch list.

No more names will be added to the watch list. The bank will keep updating the investors on a quarterly basis, said Srinivasan.

Srinivasan expects the trend in slippages to be the same for FY17, where retail banking will remain benign in term of slippages and credit environment.

The small and medium enterprise business will also continue to be fairly steady for the bank.

If the RBI resolutions continue to happen and economy does better, Srinivasan expects the watch list to come down.

Srinivasan, however, maintained that the capital position of the bank is extremely strong, and it has and will continue to grow without diluting capital.

Latha: Your watch list? Rs 22,000 odd crore of which you expect that 60 percent may go bad in the next eight quarters. Is there an upside or a downside risk to this forecast?

A: We are always, when you are looking into the future, it is always uncertain. We have taken this status of the corporates which are part of this watch list, assessed what their payment track record is right now, assessed what the fundamentals of the company are, looked at the environment and then taken a call in terms of what the probability is slippages of these companies are and come out with this watch list.

Clearly, as conditions change, whether for the better which hopefully is the case, or for the worse, the watch list will also to some extent behave. What we are saying is we are not going to add anymore companies to this watch list and we will be updating investors in terms of what is happening to this watch list on a quarter-on-quarter (Q-o-Q) basis. Of course, there could be slippages from outside of the watch list which we believe will not be too high and clearly, this is the one list to watch out for in terms of key stores of stress from the corporate lending book over the next eight quarters.

Sonia: It is good to hear that you will not be adding any more companies to this watch list. But I am a bit concerned about the accounts that have not already been added to the watch list, for example, accounts in the retail and the small and medium enterprise (SME) sector. Can you throw some more light on whether there is a probability of large slippages from those accounts, say in the medium term?

A: What we have said yesterday was also that we expect credit cost to be around 125 basis points for FY17 and that factors in slippages across all segments which include SME and retail. If you look at what has happened over the last year, and look at what would happen this year, the trends in terms of slippages will be broadly the same. The retail continues to be fairly benign in terms of slippages and credit environment and clearly we expect retail to hold up. SME has been a fairly steady business for us and we expect it to be the case in FY17 also.

Latha: Let me come back to the watch list. Would you say that 60 percent is the worst case scenario and therefore, in the context of an economy that does a little better, there could be an upside surprise?

A: If the economy does better, if resolution happens as we have seen over the last few months, we have seen pick up in terms of resolution, clearly there could be upside to this number. What we have also said is that we would try and keep the provision coverage ratio around 70 percent by the end of the year which also is fairly conservative considering that some of the resolutions which may happen will not entail such a huge provision.

Sonia: You told us about Axis Bank, but I am just trying to understand what the larger implications for the banking system as a whole could be, given that a bank like yours with a relatively lower stock of stressed assets has forecasted a fairly challenging period over the next two years at least. Do you think that the recovery cycle for the entire sector as a whole could be a prolonged one?

A: The way we need to look at it, as I said before, if you look at what banks are doing, what regulators in the government are pushing for, is for speedier resolution. And clearly as resolution picks up pace, like we have seen a couple of transactions over the last month or so, as resolution picks up pace, we should see this portfolio wind down. And come off from the levels we have indicated yesterday. And that is upside which we should hope for. And that is what is not factored in terms of what our projections are. So, the whole thing is as the environment improves, as the resolution starts picking up and solutions are found in terms of what the right capital structure and monetisation strategy for each of these corporates are, it is something which will be positive as far as this portfolio is concerned.

And as you said, we have disclosed a number yesterday in terms of what our watch list is and we are just part of the consortium. And there will be other banks who are part of the consortium in which these companies are operating.

Latha: There is one set of guys of course, like the CLSCs and the Macquaries and more importantly, the Nomuras who have actually upped the price target to Rs 575 on your stock. There are others who have told us that last year they did not tell us, last quarter they did not tell us there are so many problems, now they are telling us there are problems, will they come next quarter and tell us there are more problems? Any replies to these guys?

A: That is why we have said, in terms of the watch list, it is a closed list and we are not looking to add companies to the watch list. And we have said what we believe could be the possible slippage and what we are going to do as far as this watch list is concerned. So, the whole thing has been the market has been grappling with various metrics in terms of what could be the potential stress as far as the system is concerned and as far as the individual bank is concerned. Just to give our own insight, out own perspective in terms if what we see in our portfolio and what could be the possible stress level, that is what we have tried to do in terms of a transparent disclosure in trying to highlight to the market what that portfolio looks like.

So, as I said, it is not something which we ever try to keep away from the market, but there are various metrics going along in terms of what could be, what could be the stress levels of the system as well as individual banks, we try to indicate to the various stake holders, what we believe our view on that is.

Latha: What will this do to capital since you have to set aside more risk capital? Will you have to raise money?

A: Not at all. I think our capital position is extremely strong. Tier-I is 12.51 percent as of March 31,2016, overall capital adequacy is upwards of 15 percent. Even if we assume a credit cost of 125 basis points over the next year, and almost similar levels of next year and if you look at operating income growth which you have projected, I do not think you will requiring capital. One thing you need to keep in mind is that when we raised our last round of capital, our Tier-I capital adequacy ratio was lower than where we are today. So, even though for the last three odd years, we have grown our balance sheet. We have grown without diluting our capital and that has been our biggest achievement and that give us sufficient room in terms of absorbing some of these credit costs and also have sufficient room for growth.

Sonia: Apart from asset quality pressures, the other worry is the sluggishness that is expected in the corporate loan book growth. For axis bank, what are the expectations of loan book growth in the corporate segment over the next 6-12 months?

A: If you look at what happened in FY16, even though what you said is true for the system, for us corporate loan book grew at 22 percent. So, clearly, we have pockets available to us of highly rated corporates where we have been able to grow and in spite of the system being fairly flattish in terms of growth. So, we expect that to be the case in FY17 too. We believe that we can grow our corporate book and gain market share as far as highly rated corporate sectors are concerned by better structures and better pricing and which is what we will try and do.

Latha: A final brief question. As a person who has his pulse on the economy, can you say with some certainty that bankers will have a slightly better time in FY17 than FY16?

A: You need to separate it out across two dimensions. One is the operating environment and what happens to your operating income and profitability and second is in terms of what happens to your legacy book, what sort of provisions a credit cost can entail. So, we believe that the environment in terms of overall banking sector will possibly be more positive than what we have seen over FY16. But as far as credit costs are concerned, we will continue to stay elevated. So, it depends on where each of the banks are in terms of credit costs and that would determine in terms of what the bottomline is. But we are positive in terms of the sector and environment in terms of growth, in terms of both loan growth being slightly higher, rates being slightly lower and overall, the ability to do business better as far as FY17 is concerned.

Sluggish Chinese economy, Brexit may renew fears of recession

Markets are showing signs of fatigue ahead of key policy meetings from Bank of Japan and the US Fed later this week.

In an interview to CNBC-TV18, Udayan Mukherjee says the correction in the Nifty has been modest.

From mid-February onwards, a lot of emerging market indices have performed well. Largecaps, in particular, have rallied about 30-40 percent during this time and foreign direct investments have come down, says Mukherjee.

“And so there is no harm in taking profits and stepping to the sidelines,” he says.

Global trends will play a key role in deciding how investors react in May — and it would be best to take it one day at a time, says Mukherjee.

If the US Fed takes a hawkish view, panicking won’t help. But worry you must if the Chinese economy turns sluggish or Brexit happens, because these developments would bring back fears that the world is slipping into a recession again, says Mukherjee.

As the earnings season in India kicked off last week, Mukherjee feels it has been a mixed bag.

Mukherjee would buy Axis Bank over ICICI Bank   any day. Axis Bank   is the best private sector bank, he feels, as its valuations are reasonable, and the management has shown far greater prudence.

Sonia: There is a bit of trepidation in the markets ahead of these global events, the Federal Open Market Committee (FOMC), the Bank of Japan (BoJ) meeting, how would you read into that?

A: The market is showing some signs of tiredness. I don’t think there is any great sign of weakness on the screen as such. Traders who are long, I don’t think there are any panic signals flashing on the screen at all. You can sense some fatigue and that is understandable given the extent of this rally — we have rallied about 1,000-1,100 points in a very short span of time on the Nifty.

At this point, as we can see with a lot of domestic institutional investors (DII) action, people are taking profits, some people are getting a bit cautious ahead of the important events, which are lined up over the course of the week and anyway we are wading through an earning season, so people are in wait and watch mode.

So, the correction has been very modest so far, just about 100 points on the Nifty. So as I said, it is probably more fatigue and tiredness rather than anything more significant than that. But the global events will be very key during the course of the week — what the Fed comes out with and says and how to interpret that because there are short-term and long-term ramifications of what it could do to markets.

Latha: There is this usual sell in May and go away phenomenon and hence the fear that since mid-February a lot of indices have rallied a lot, a lot of emerging market indices have rallied a lot and therefore will it be right for profit taking in May?

A: It is right for profit taking and that is happening in any case because a couple of days back, the market started with a bit of a gap up and almost attempted 8,000 peak and then it got sold into. So I think there is already an awareness that we have come a long way. Individual stocks have rallied, largecap names have rallied, 30-40 percent. We can see that the foreign institutional investors (FIIs) flows have started diminishing as well compared to last month. So everybody seems to be feeling that we have had a massive rally to an extent, I would imagine that a lot of people would can see, it has been unexpectedly large rally globally and locally and therefore there is no harm in taking profits and sitting on the sidelines.

Whether it turns out to be a sell in May and go away or a different kind of May, which basically remains vigilant — during this May, you can take it day-by-day would be more appropriate kind of a phrase to summarise what might happen next month because I think the market is now quite worried that given the strength in global markets and the fact that the US market is pushing all time highs, the Fed might use this opportunity to become a bit more hawkish and if that happens, you will see pressure on emerging markets, emerging market currencies and India might also correct.

My take is that if that were to happen and that was to be the reason for the correction then I think it would be no more than an orderly correction making a sharp pull down but that would still very much be within the buy on dips strategy for a lot of people. I don’t think people should panic if the Fed sounded a bit more hawkish because the underlying principle would be that the Fed is breathing easier about the state of the global economy.

If however, in May the old problems come back to the table which is that the kind of softness that we see in the Chinese market and the yuan offlate that starts festering once again and worries about Britain exiting EU, China becoming sluggish once again and those bring back to the table all those familiar fears of the world going into recession kind of phase, I think that is a far more pernicious outcome for the market and will dent it back far more significantly. So I think if this is a hawkish Fed tone, which triggers off this correction in the market then I think it would be 7,400-7,500 kind of correction if that for the Indian Nifty. If however, the global fears come back in a bigger way led by yuan and China then I think all bets are off and you need to start very cautious about the trend once again.

Sonia: X of some global catastrophe, what do you think the trend could be over the next six-eight months because the view so far is that the rally since the Budget day is a resumption of the bull trend in the market with some minor corrections in between. Would you concur with that?

A: I don’t know how everybody can take a call on that because you have prefaced the question with a big X and that X is the big unknown elephant in the room. You said X of global volatility but this is all about global volatility.

Sonia: I said X of global catastrophe — volatility we all can handle but if there is a catastrophe then all bets are off, right?

A: Of course but catastrophe is difficult to predict so let us not talk about that. I think this trend has a long to do with how this global outcome pans out. As we have discussed many times in the past, it is all fine in the midst of global trend to talk about your own market, its pluses and minuses and arrive at some kind of a trading strategy.

We have had a big global rally and the month of May or the next few weeks will tell us whether this global trend will continue with punctuated by some kind of corrections. If that is the case then we are very much part of an uptrend which might take us higher in the near-term.

However, it does not take long as we have seen for things to change and risk-on to become risk-off. So you need to be very vigilant about what is going on in the global space. The dollar particularly will probably give you a lead indicator of whether bad times are coming or this is just going to be a correction after, which we can see a resumption.

I think for traders who are long India, they should certainly keep their window open for a correction and then the resumption of this rally which can take it to an eventual target of something like 8,300 which we spoke about last time. I think that trade is still on the table but it could change if the global context changes and levels like 7,600-7,700 gets taken out from the Nifty on the way down. This is the time to not panic about the trend, which we have been in but to be hyper vigilant about which way the global wind is blowing because that will determine whether this remains a buy on dips market, or it gets pushed back in to an intermediate downtrend once again.

Latha: I don’t know if you have read the recent Creidt Suisse report and the dramatic change in stance they have taken on the material space believing that the steel restocking can continue for the next three quarters. So for the next nine months, they are bullish on metals in particular steel. How do you rate that metals in particular, buy even now?

A: We spoke about it briefly last time. The kind of trade that we have on our hand right now can be summarised by bad is good. The worst markets are doing the best. How can you justify fundamentally Brazil and Russia outperforming India by such a large margin during the course of the year?

So I think this rally has a lot to do with the under-owned sectors outperforming and because we spoke about how the genesis of the rally was because of ultra-pessimism and under-ownership of many sectors. So now the bad sectors have a good chance of tactically doing much better in the near-term and I would classify commodities or metals in that bad space.

This will not last forever. I have read the report and they are going out and saying that the kind of stimulus packages that they are talking about in the second half will continue to drive the metal cycle higher. Time will tell whether that is a good call. If it is, it will be very handsomely rewarded call because they are buying very low in the metal cycle.

However, I think at this point in time, you don’t want to believe very long-term forecast about the metal space given the kind of problems that the world is dealing with. It is best to look at some of these sectors like metals and public sector banks as very powerful tactical trades, which are playing out because of the terrible under-ownership that they suffered from. So you want to participate in this trade as we spoke about last time but these trades have a good chance of changing at some point in the future.

You were asking about whether this is a resumption of the bull trend. I have never seen too many bull trends which were led by essentially weak sectors like metals and public sector banks. So at some point, I think these tactical trades will end because valuations would have come back to what would be reasonable levels and not those terrible beaten down levels. Then people will start looking for earnings, growth, solid balance sheets, the usual stuff which creates wealth in the longer-term.

So if you are a smart trader, there is a good chance that you should be participating in some of these trades like metals and public sector banks but do remember that these are not great companies essentially and they go into deep bad cycles.