After ICICI Pru, other insurance cos may opt for IPO: HDFC Life

According to the terms set for the Max Life and HDFC Life merger, Amitabh Chaudhry, Managing Director and Chief Executive Officer of HDFC Life hopes that his company will be listed in the next year.

After ICICI Prudential received remarkable valuations, he is confident that other insurance companies will also follow suit. He expects SBI Life to also be listed very soon.

He is very confident about the insurance industry’s growth and says the sector will grow at around 15-17 percent soon. Growth has been slow in the sector as companies try to maintain margins and perform consistently.

The company is hoping to get CCI, IRDA and SEBI approval for the Max Financial   deal by December 2016.

Max Life and HDFC Life merger cleared a big hurdle recently. It received minority shareholders’ approval for payment of non-compete fee to Analjit Singh.

Prashant: ICICI Prudential is down some 6 percent, a little more than that. Surely other potential companies, which want to come to the market would not be discouraged by that first day response?

A: I do want to congratulate firstly ICICI Prudential for the debut on the stock exchanges. They did this issue in a record period of time.

Yes, the stock price is down. It is a long-term investment and the valuations, which they have got are pretty remarkable. So, if the stock price is down a little bit, I am sure over a period of time the share price will do well. It does bode very well for the insurance industry as you know that the regulator has been pushing their insurance players to go and get listed. There is a draft guideline out, which talks about how regulator would like to have board approved policies on every insurance company getting listed in the market place. We as part of the transaction with Max Life hope to get listed sometime next year. I am sure SBI Life will also follow because they have been talking about listing for some time. So, yes, this is a very important step. Share price is down but that is a temporary phenomenon.

Prashant: What should we expect? You know the business as well as any other CEO in that space, maybe better. What should investors be prepared for as they kind of get into this new sector, lots of interest of course but what should we expect?

A: If you look at even what ICICI Prudential sold part of its shareholding almost a year back and what valuation they have got now that in itself reflects the huge amount of interest in the sector. You will also see that when we announced our transaction with Max Life, how the price of Max Financial Services has moved over the last six months or so. We have also gone and met and I am sure ICICI Prudential did the same, a number of investors in Hong Kong, Singapore and US and the level of interest is high.

It is driven by number of factors. First is that over the last five or six years the private sector has worked very hard to clean up its model. Now the insurance sector is quite profitable. The insurance sector has started growing. We have seen growth rate of 15-17 percent over the last two years. Even this year the growth rate has been quite good. The mis-selling in the industry is coming down. The persistency ratios are up. And most of the guidelines in terms of regulatory perspective which will impact the sector are out or on their way and there is kind of clear view which insurance industry players and the regulator has in terms of what we can expect on the regulatory side too.

So, if you look at all these factors the fact that the operating models are now quite clean, they are profitable. The sector is growing, mis-selling is coming down, the persistency ratios are up, the growth is back, the regulatory risk is reduced. Yes, it is a great time to invest in the sector for the lon-term. Ultimately insurance product is a long-term product. People who are investing in the insurance industry should also look at a long term outlook and invest in the sector for a long term and based on all the meetings at least we have had with investors and the interest we see, we believe that there is a real play for at least 3-4 large players to come and list in the market and do quite well.

The way ICICI Prudential — how quickly they have got this issue out and the kind of demand they got from the market is also reflective of that.

Market led not by liquidity alone, eyes good earnings: HSBC AMC

From the lows in the February, Indian equity benchmarks have made a stellar comeback and have been trading range-bound, near all-time highs.

Nifty has gained more than 1700 points as of today, since its low point of 6976, back in February 11, 2016.

It won’t be appropriate to say that this market rally is just a liquidity driven one, says Tushar Prashan of HSBC Global AMC.

In an interview with CNBC-TV18, he said that the market is anticipating a better earnings growth going ahead, on the back of which it has rallied.

He said that the market has stayed resilient over the last two years as bond yields have dipped 200 basis points and does not see a major rate cut going forward.

The interest or bond market is more volatile then equity at the moment, he added.

On the sectoral front, he said that IT companies are unlikely to see a repeat of the last 20 years growth and added that the space needs to reinvent itself and find new growth areas.

Anuj: The big question for the market is how much more room for this liquidity driven rally? Off late we have seen some tempering of flows, some tapering of flows, do you think that is just a temporary phenomenon or do you think there are risks to the market now?

A: Every market has risks and I don’t think there is any time that the markets will not have risks. However, having said that, it may not be appropriate to just call it a liquidity rally. I think it is more to do with also the fact that the market is kind of anticipating the kind of earnings growth that we expect our market to turnaround as well as the economic turnaround that we are talking about.

So, in a sense we do believe that there is going to be something which the market is discounting at the moment. If you just attribute that to liquidity, I think that will lead to a lot of noise and volatility. I frankly have no idea how to estimate those flows. However, I think when you look at what the market might be discounting for which the market level today is, might be that the market is looking at the future and the kind of earnings growth that it seems to be thinking that is likely to come.

Latha: Commodities options getting launched, commodities actually now in the hands of a professional capital markets regulator for the past one year, is that a theme you play at all?

A: I am frankly not really conversant with how that part of the market works. However, I know that having been around for a bit in terms of how the development of markets does happen worldwide, it is very important for us to understand that all markets are actually interlinked. So, when you have liquidity flow through and access which is probably for some time not available for many players, when that access becomes available then you find that there is a lot more science to the price discovery.

So, just to give you an example, if you had the ability to really play through the commodities cycle by having access to these products which can either hedge your exposures in anyway, you are actually pretty much linked to what happens to the listed universe as well. However, if you are in the listed universe, either as an investor or as a company, and you have no access to reduce your risk then there might be pretty significant moves which you cannot do really anything about.

So, I think more than just a direction of the valuations going to these companies, I think it is more to do with just the fact that it is becoming more of a liquid market, it is becoming more of an integrated market where everybody knows that the more information available for any market player, the better and more efficient the market is. So, I think it is just a step in that direction.

Anuj: Let us talk about some larger themes then. The big legs for this market in terms of this rally has been banking and consumption, the discretionary consumption that is autos and couple of others in that bracket. Do you see leadership staying with this space, do you think there is enough earnings momentum here or the earnings momentum will catch up in some of these sectors going forward?

A: Difficult to estimate at this point of time because whenever we look at a market or a stock going forward, we always have the benefit of hindsight. I think in the last two years, we have seen some sort of tepid growth and most of the expectations rely on what has been achieved in the last couple of years or so. However, if you are talking about an economic turnaround, if you are talking about the last five years of economic gross domestic product (GDP) growth touching between 5-5.5 percent or so suddenly moving up to 7-7.5 percent and earnings growth which has been absolutely negative to flat for the last three or four years, suddenly turning into mid teens and then slowly going on to higher teens as well going forward, who knows — we really may have just scratched the surface in terms of where the price movement can be.

It all depends on the momentum; it all depends on the speed at which the economy turns around. We all know that there is a lot of latent demand in our economy and that has been curtailed by either lack of significant economic growth or the fact that interest rates have been really high in our economy. So, when all of these things start to change, what is the volume, what is the degree of what the economic turnaround is likely to be? It is really for us to guess. So, I would be skeptical about just writing it off and saying is that it, is there anything else out there as well.

Latha: What is your in-house view on where the 10-year can trade, the GILT, are you seeing it at 6.5 percent in a quarter or so and how does that influence your stock picking? Would you be incrementally in public sector banks for instance?

A: That is a good question and I think you will allow me a little bit of a clarification in terms of how we view the market. I think over the last two years, one of the reasons why the stock market has remained pretty significantly resilient is the fact that we have seen almost a 200-250 basis point decrease in bond yields and that is very significant. If you say that my market was trading at 16-17 times two years ago when the bond yields were close to 9 percent, and today when the bond yields have cracked 7 percent and my multiple is either the same or slightly higher, then I would think that the market is cheap relative to what it was two years ago. So, the discounting factor clearly plays a huge role in valuing equity stocks.

Now, your other question of where we view the 10-year to go? I think we have to understand that whatever has happened with the inflation trend as well, I think there is clearly some bottom to where we think the yields will fall to. I don’t think we are in an environment where there is tremendous amount of liquidity which can either come domestically or from the external world to kind of feel that we will be headed towards very low interest rates in India. So, we will continue to be deficient in capital in that sense and we do have that sense that interest rates will fall a little from here but I am not expecting a huge crash there.

As the economy turns around and the demand for credit starts to pickup, then you will also see some sort of flattening. I am still not saying that interest rates will rise from here but the fall that we have seen has been fairly steep, that has led to the equity valuations where they have gone as well and going forward I think we should see some flattening out of the curve as we start going up and as demand starts picking up and it depends on how liquidity pans out at that time. So, interest rates I think are anybody’s guess. If you look at volatility, I think the interest rate markets and the bond markets are more volatile than the equity markets.

Anuj: How are you positioned on IT; that is the other important space because on that the opinion is split. Some expect more de-rating because the business is going through challenges and others are looking at the historical price to earnings (P/E) valuation and saying that stocks are available at cheap valuations. Which camp are you in right now?

A: I would like to sit on the fence on this one because on one hand as you mentioned, it is more to do with the fact that the fundamental model of this business really which has had a dream run in the last 20 years or so, I think is undergoing some significant changes. On the other hand, there is no alternative, there is no replacement as such in the sense that if not this, what else. However, one should also be wary that the kind of growth that this industry has seen in the last 20 years is unlikely to be repeated and I am not saying a big thing, it is just the fact that these companies will become extremely large and to kind of expect that they will continue to grow at that pace that they have grown in the last 10 years, is a little unrealistic.

So, all of those headwinds really tell you that maybe this business as we see it, has matured but as we go forward, the IT industry has surprised us with kind of re-inventing itself over a period of time and we see and we hope that they kind of re-invent themselves and get out of this funk as they have fallen right now into and who knows they lead us into some other sort of growth area that we don’t know right now.

So, I would kind of be neutral, our portfolios also represent that position. We are cognizant of the fact that they are very significant part of the market and significant part of the India story. However, the excitement that we saw in the last few years, in terms of the growth and the sustained cash flows, I think that will need to be tempered a little bit just like any other industry.

Latha: This is a thematic question, which do you think will perform the best in the next one year, HSBC Equity Fund, I mean the largecap fund, HSBC Midcap Equity Fund or the India Opportunities Fund?

A: I will try to caveat the fact that I will not be able to speak about my products but generally as a theme if you ask me if midcaps will do better than largecaps, I think the valuation differential that we see between midcaps and largecaps has actually come close. They tend to trade at a discount at most times because they are smaller companies, higher risk. However, in the last one or two years we have seen midcaps really do very well and for good reason; it is just not because they are midcaps but it is just that business fundamentals for them have been very robust.

However, one has to be aware of the longer term valuation differentials; that points to now that there is some opportunity in the largecaps versus the midcaps. However, if you want to deep dive and make a more fundamental decision, then I think even quality midcaps which are trading at substantial premiums than they were ever in the history, one should relook at them because now they are not the same companies as they were when they were trading at lower multiples. They are larger and they have significantly more robust business fundamentals. So, I think it is more of a one-to-one case that you would like to look at the more individual midcaps but as a whole I think valuations clearly are significantly more richer in the midcap space than the largecap right now.

Nomura pegs upper end December target for Sensex at 30,500

Speaking to CNBC-TV18  Prabhat Awasthi of Nomura Financial Advisory said that public sector banks have their own asset problems. He says that the capital issues still exist, but incrementally the news on non-performing assets has been better.

He believes Sensex to touch 30,500 in 2017. The lower end will be 29,000, he maintained. “We are sticking with that because the earnings have gotten better, and there has been no major cut in earnings.”

As regards earnings, he said the overall growth profile is good. “The discretionary part of auto has done well. I don’t think it changes materially,” he said, adding that, there has been some relief in metals, because prices have moved up a bit. It is also a good thing for banks, he said. “Stresses in economy is continuing to reduce.”

The sequential momentum is reasonable, he said. The second half of last year was poor, and so from a base effect perspective, it will be good on a year-on-year basis, he said. On a trajectory wise, it will continue as before.

Anuj: It has been an interesting time for fundamental investors and fundamental analysts because the market has moved on liquidity, the earnings growth has still not caught up but the market has also continued to move on and get closer to its previous highs. What is your sense, at current levels? Is this global volatility giving an entry opportunity or is this giving a bit of a reality check on the state of the market?

A: The market has not really materially fallen; from the peak we are down about 200 points on Nifty which is like 1.5-2 percent. So, I don’t think you can say that is an opportunity which is the reason because the market has fallen a lot. It still continues to be a tad expensive. However, that said it is not very expensive; slightly expensive but not cheap either for fundamentals investors is said to buy because there is a massive correction. So, it is sort of stuck in a zone where it is not very appealing and as you have rightly said the growth is anyway going to pick up slowly, it has picked up but the way the market has moved up, it sort of moved much faster than the earnings have started to rise.

Latha: Therefore how are you approaching the market? Are the valuations scaring you or do you think that this market is going to move at least as much the earnings growth are indicating?

A: The market, if you take a one year view you still have upside, you take a six months view you probably have upside but the issue essentially is that if your earnings are going to grow at 15 percent over next one year your return profile could be 5 percent lower than that or if the market become more expensive than five percent higher than that but the point is that comfort with regard to when you are buying the market 14.5-15-17 times, obviously has diminished.

So, it is not a market which is going to scare you simply because of the fact that it is not trading at 20 times where the compression on account of multiples could eat away any earnings growth that you are going to show. So, you are going to get some returns but obviously the return could potentially be muted; the multiples to compress because they are at an elevated level, they are about 10 percent higher than long range average. So, that is the risk you sort of live with, maybe 8 percent now.

Anuj: I am just looking at your overweight calls. The two top overweight calls have been the big legs of this bull market, financials and discretionary consumption. Your thoughts on whether hereon as well these spaces will continue to do well and importantly your overweight call on IT services and we have seen IT index trade closer to its 52 week lows than highs. Are you sensing a good entry opportunity here?

A: Let us start with financials. If financials are an expression of the fact that you are bullish on the market, it is the largest sector. It benefits from either a recovery in economy both on the industrial side or the consumption side because they fund the consumption as well. They are in a sweet spot because the rates are low and finally the translation is starting to happen in India. So, that frankly gives them lower liability costs. The non-performing asset (NPA) cycle is largely over. These stocks have raised a lot but they are still not very expensive compared to some of the other domestic sector. So, financials are still okay in terms of just expressing yourself, in terms of market and the fact is that there will always be growth here. Obviously the growth within various constituent of financial sector will be different. Clearly private sector banks especially the retail ones are doing much better in terms of growth and that sort of compounding will continue to happen. So, this is a sector which is looking pretty okay in the long-term.

Discretionary consumption which is autos, again that was not that difficult to call because you essentially had and you still have a falling interest rate environment, decent stimulus to incomes; you have got a goods and services tax (GST) coming up which will benefit this sector. So, you are eking out a decent growth again there and the raw material environment has been reasonably okay for these guys and it probably will remain like that and the stocks have run up a lot, so they could actually pause for a while and then start resuming their uptrend, just catching up the valuation. However, the fact is that fundamentally you have 15 percent growth in some of the companies in terms of volumes, so if you take a five year view you cannot go wrong or a three year view or a two year view actually. So, that has been the very basic story there.

Tech, actually we are sort of becoming increasingly concerned but the fact is that so far as defensive is concerned this is what defensive sector we have had for last four-five years. This year has been tougher simply because of the fact that growth has slowed down. But on a portfolio construction basis it is okay but to see that they will make huge amount of absolute return from here is unlikely because while the stocks have fallen, the growth has also sort of given off. So, sector challenges remain but part of that might be priced in.

And purely if you are looking at being overweight lot of domestic cyclical where do you sort of have your defensive hedges you have basically consumer, pharmaceutical and IT. I find consumer very expensive. Pharma has its own challenges. We have been underweight for a very long time. So, IT is sort of one place which rebalances the risk basically.

Earnings could grow @14% this fiscal year: Birla Sun Life AMC

Speaking to CNBC-TV18 Mahesh Patil of Birla Sun Life AMC said that in NBFCs valuations are on the higher side. “We don’t don’t just look at near-term PE multiples. We take a longer view. This is a good sector to be in.”

Return on equity in this sector has moved up, he said, adding that he is not expecting any further rerating.

Auto will play out well in this festival season, he said. “There should be a strong pickup. If it doesn’t pan out, then there could be a problem. For the next two-three years, we should see decent pick-up in the auto sector.”

He expects the four-wheeler industry to see a revival, though it won’t see any margin improvement.

As regards cement, he said in the southern and eastern regions of India the demand-suppy is unfavourable. “Volumes growth has slowed down after strong performance in the early part of this calendar year and prices are holding on well.”

His top sector picks would be oil and gas sector. Even in pharma, there is decent visibility in a few stocks. The media sector as a proxy for consumer staples sector looks good, he said, adding that corporate banks are also a good bet.

He expects Nifty to be at 8500.

Earnings growth could be around 14 percent this full fiscal year, he said.

Telecom as a sector is undergoing a transition phase where there is a disruption in voice and data. “The spectrum auction will have to be watched and the sector needs to consolidate,” he said.

Anuj: Is the market giving another buying opportunity with this minor correction because that has been the market’s nature so far. It just had a one way rally and just maybe 1-2 percent corrections in between.

A: Any correction is a buying opportunity. The corrections have been pretty minor and people have been expecting some correction in the market looking at some of the global cues. We have seen some slowdown in terms of foreign institutional investment (FII) flows also and big events which are there in the next month. So yes, there is an expectation of a correction and we believe that any correction in this market should be used as buying opportunities as enough good news on the domestic side which should play out in the coming months.

And also, if you look from the domestic perspective, the policy front, interest rates. You should see good news flow coming through. Even the monsoons have been good and expectation of that playing out in terms of consumption in the second half, is what we are expecting.

We have seen the two-wheeler companies also pretty buoyant in terms of the festive season. There is a lot of inventory stocking up which has happened which one has to wait and see how the festive season pans out to really get a clear indication of a demand pick up.

Latha: But just before I get to the stocks that you will prefer for exactly the themes you are speaking about, is it good to buy gilts now?

A: Gilts, we have seen a good rally. We have been, as a house, pretty positive on the government bonds and to a large extent, it has played out. Our belief is that inflation could still come down. We are expecting that it should be around a 4 percent or 4.5 percent by the end of this fiscal year. So given that, there is still some room there on the policy rates to come down and given that, we have already seen the bond yields – because of better liquidity and the open market operations (OMO) by the RBI – we have seen the yields coming down. There is still some steam left over there, but bulk of it has played out.

Latha: What is the sense you are getting on specific sectors that you will play? Let me start with non-banking finance companies (NBFC) since it is everyone’s favourite. You still find value there?

A: In NBFC sector, valuation in terms of relative context, historical levels, probably are slightly on the higher side.

Latha: So, you will not buy now?

A: When we are looking at stocks, we do not just look at the near-term price-earnings ratio (P/E) multiples or the price to book value multiples. We tend to take a slightly longer term view of what we see the opportunity and the longer term growth and given that these are good sectors to still be in. A lot of the tailwinds are favouring the sector in terms of the opportunity, in terms of liquidity, interest rates coming down and valuations again, if you look at compared to historical levels, even the return on equity (RoE) for a lot of the companies have actually moved up and in fact, in this credit cycle, most of the NBFCs have played out pretty well. So given that there is a rerating which has happened and which is pretty well justified. However, we are not really expecting any further rerating in this sector, but earnings growth is something which still looks good and given that it continues to be a hold.

Latha: So, hold tight if you are in them?

A: Yes.

Cycle of stressed assets in public banks is over now: JP Morgan

JP Morgan believes that the non-performing loan (NPL) cycle for Indian banks is over. In a report by the firm, it says that recognition of stressed assets is likely to come down in coming quarters.

Speaking to CNBC-TV18, Harsh Wardhan Modi of JP Morgan says that while resolutions take long time, recognition is the first step towards resolving the issue. “Peak of NPLs is already there,” he says adding that NPLs seen a 650 basis points uptick in the past.

Capital adequacy as well as deteriorating market share is still a challenge for public banks, but the regulators are stepping in to help them.

Modi sees earnings visibility for non-banking finance companies (NBFCs) for next 2-3 years, especially the housing finance companies.

Latha: Is the worst of the non-performing loan (NPL) cycle over?

A: We believe so. One of the key defining factors of peak of any NPL cycle is when the banks start recognising and admitting that there is an issue. The fact that asset quality review (AQR) forced banks to start recognising NPLs and call spade and spade, we believe it is a turning point and we feel it across Asia. A big chunk of emerging ASEAN banks are still under NPL cycle. In North Asia, Chinese banks are still grappling with recognition of NPLs.

Resolution takes its own time but the fact that recognition has happened which we believe is the first step towards ultimate resolution and the bigger point is as soon as NPL formation starts showing up, so, right now if you see, in second half of FY16 more than 600 basis point of NPLs were recognised in the bank’s balance sheets and that we expected to start going down closer to 200 bps in next couple of years. So, once recognition happens that is the first step and we are very firmly moving towards the resolution. So, yes it is a unique opportunity across Asia where a large banking market like India has in what we believe turned the corner and moving towards growth rather than more stresses on NPLs.

Latha: Just two more points I have heard to the contrary. One that there is still unrecognised stress, part of it is of course restructured assets that will come in and fresh unrecognised stress, there are some people who believe that the total amount of bad loans could be northwards of Rs 8.5 lakh crore. So, what is your counter to that and secondly even if the stress is recognised, only about 20 percent is provided. So, are banks still going to bear the burden of past sins?

A: These are fair questions and we also believe that recognition is not done yet. All we are saying is peak of NPL formation is already there, so, as I said in second half of FY16, we had north of 600 basis point of NPL recognition, NPL formation that is going to 270-280 basis point in this fiscal and then below 200 bps in FY18 and FY19. The more important point is not that there is more to go, definitely there is more to go, but that the process of recognition has already started; so that is one.

On credit costs and NPL ratio, definitely they will lack. Once you recognise NPLs, second step is then you start providing for it. However, the more important point from a stock perspective is, as an investor and analyst, we can put our hands around okay this is what the total problem loans are, call it NPL, call it watch list, call it stressed loans, at least we know what it is, we can take a stab at what kind of losses will it entail, take it out of capital, take it out of your return on equity calculation but then we can move on from that.

More importantly, more than what we do as investors is what bank managements does. For a large part of last five to seven years a lot of the bank management time and efforts were spend in not calling a spade a spade, saying okay there is a problem asset but can we not call it NPL, can we restructure or whatever. Now, they have moved from that towards we have classified it as a stressed loan, as an NPL, we have to provide and in due course it will happen but let us think about growth, let us think about pre-provision operating profit, the number which genuinely matters towards higher profitability rather than fighting the past battle of NPL. So, reported numbers, it is a long tail but the process has begun.

Anuj: In that case our Indian public sector banks are good buy even at current levels, we have seen quite a bit of rally for example in State Bank of India (SBI) , that has been of course the leader of the pack, even Bank of Baroda (BoB) and Punjab National Bank (PNB) from the lows we have seen quite a bit of rally and price to book value still looks quite attractive for most of them trading sub book. So, are they still good buys?

A: On PSUs, there are three factors we would say. One is the fact that these banks have very strong deposit franchise. That has been the case and as of now 74 percent of market share is held by PSUs. It has been coming off, the peak was 77 percent about three years ago, we are at 73 percent but still it is a big number. That is one. The second factor is, this is deteriorating very fast which is the private sector banks are taking away share and that is continuing so that is negative. The third and the most important factor is the capital adequacy at these banks. It is challenged. However, what is also fair to say that the regulators are essentially stepping in and there is a degree of forbearance which partly offsets this limitation on capital inadequacy. So, these are the three different factors.

Now, so then how do we think about valuations? In a scenario where both book values and earnings are challenged, we have tried to focus again on a regional perspective more towards what is the franchise value. So, we did comparison with Chinese banks, we did comparison with Korean banks, with Thai banks post 98 and when I say franchise value, we are looking at market capitalisation to deposits, we are looking at operating profit generating ability of these banks and on those metrics, as a cohort PSUs stand up relatively well compared to the regional similarly placed regional banks. So, I would say in terms of taking a view on the private sector bank stocks, it has to be a triangulation of these three factors and those changes over a period of time.

Latha: NBFCs have run crazily, are you still a buyer there?

A: NBFCs have created a very nice, niche business in last five to seven years and our belief is again a combination of three different offerings. One is a lot of these businesses are built up on what their sister companies or parent companies built franchise on. Second was a lot of private sector banks took the eye off some of these smaller niche, in fact they were not even there and PSUs actually took the eye off especially in the semi-urban and the rural segments where NBFCs made a very good business out of it.

Some of that is defendable and we definitely think over next couple of years there is earnings visibility in some of these segments especially housing finance related. The challenge though is once PSUs and the private sector banks choose to either chase for yield in the niche segments of NBFCs or come back for growth in some of the rural related sectors especially PSUs, we will have to be very careful on picking the right names rather than having a blanket view on NBFCs as a whole. So, I think we are getting to a point where we should start seeing a more nuanced pickup between different names in NBFCs rather than the entire cohort in one go.

Bullish on autos, NBFCs; see no recovery in private capex: Gubbi

Pramod Gubbi, Director Institutional Sales, Ambit Singapore is of the view that the long-only funds are still circumspect on India because of the liquidity driven rally.  However, there is increased confidence among them on back of some turnaround in the economy due to some reforms policy changes.

The rally seen in the market so far has been driven by liquidty into excahnge traded funds (ETFs), says Gubbi.

So, the house is structurally positive but near-term circumspect on valuations and EFT led rally. According to him, the nature of money that is coming in such that it can reverse quickly.

ETF money so far has gone into largecaps and index stocks, says Gubbi.

He is very upbeat on spaces like autos, consumer and consumer discretionary. The auto space has been a structural leader given the high level of penetration and short-term could be driven by pay commission and pick up in discretionary spending. So, long-term inventors can look at  good quality companies within that space where valuations can be overlooked with eye on long-term investment.

He is also bullish on private sector banks and non-banking financial stocks but not public sector undertaking banks because of no recovery in their balance sheets.

However, he is very skeptical about industrials since there are yet no signs of pick up in capex for them.

Anuj: Since you represent the sales side, I want to know what has been the feedback from global investors. Post the Fed move, the market had one big pop and after that we have seen a bit of a consolidation. For global equity markets what is the sense from here on?

A: Foreign institutional investors (FII) into India are taking a more discerning look. A lot of the run up due to liquidity has not come through the traditional long only investors although they are also buoyed by the way the markets are rising and are participating actively in fundamentally strong stocks.

But much of the fundamental or rather, the drivers for the rally is coming through the liquidity through exchange traded funds (ETFs) and more liquid funds, which allow investors to get in and get out quickly. To that extent, yes, people are cognisant about the liquidity and are worried about second guessing where and when that will end. They would rather stay invested in stocks that they believe are good from a fundamental and long-term perspective and take benefit from the buoyancy in the markets.

Sonia: Since this rally is being driven by ETF money, where do you see that money flow into over the next 3-6 months?

A: Given most of the ETF vehicles tend to pass itself in the largecap and the index stocks — that is where the drivers are — but the rest of the market because the opportunity is pretty much saturated in largecaps, at least the way we see it, tend to participate in relatively smaller or largish midcap names. If the liquidity continues to flow, there will be a more broader market rally, but like I said, neither I nor most of our clients want to second-guess if and when that liquidity is going to end. So, this is the big caveat that this liquidity has to support that sort of a broad market move.

Anuj: The problem for this market has been in terms with leadership. It is struggling a bit off late in terms of banks, IT, of course, autos have done well, but they cannot contribute much beyond a point. Reliance has come back, ITC is making a bit of a comeback? What do you see as the leadership space going forward?

A: Fundamentally speaking, where there is potential for earnings growth to sustain and therefore justify the sort of valuations that we are seeing may not be that easy even with the sort of earnings growth but relatively speaking it still remains consumer and consumer discretionary, private sector banks and non-banking finance companies (NBFCs) where earnings growth could somewhat justify the valuations.

Elsewhere, given the state of the economy, we do not see any private sector capital expenditure (capex) picking up nor are we seeing any sort of recovery in the public sector banks’ balance sheets. So to that extent, it will remain limited to these sectors where we will see earnings growth buoyancy and an easy way to justify valuations.

Sonia: It seems like there is a churn taking place in this market now and even if you look at what is happening today, reliance is zooming, a new 52-week high there, seems to have assumed leadership once again. How would you approach this change in texture of the market constituents?

A: I would rather commenting on smaller specific stocks, like I said, if we take a top-down view of where the economy is headed, the sort of changes that this government has implemented, both policy wise and also certain other things like the attack on black money and stuff, it is clear that there will be pockets of the economy, which will benefit and will continue to grow the sort of stuff that I mentioned, consumer, both urban, and hopefully with the monsoons, rural consumption also holding up. Also, given the way public sector banks have left an open field in terms of market shares to be taken away by the private sector banks and NBFCs, those are obvious areas.

And like I mentioned, industrial capex is unlikely to come up so, any sector exposed to private sector capex is unlikely to see any sort of recovery and hence, profitability in that sector will also remain fairly muted. For that to attain any sustained leadership in the market, I see it as a challenge. In the short-term maybe driven by liquidity might see a bump up, but for a sustained change in the texture of the market, in terms of leadership, we will have to see some structural changes or rather clear changes in the way the economy or rather the leadership in gross domestic product (GDP) growth is driven by those cyclical sectors.

At this stage, we do not have any evidence that that is the case, so any sort of change is temporary in my view.

Anuj: You spoke about ETFs and truth to be told, a large part of the money is via ETF and that has driven the markets as well. But what has been the feedback from the long-only India funds, some of the largest investors into India? Are they investing in India right now or are they raising cash levels, if you have had any kind of feedback from any of your clients?

A: People are circumspect clearly, given the rally and there is not much money left on the table in terms of margin of safety as far as valuations are concerned. However, there is increased confidence in the way the economy is turning, people are fairly comfortable with the way the government is ringing in policy changes.

To that extent, they remain structurally positive, but are a bit circumspect in terms of near-term valuations. The hope is that there will be some sort of a correction where global asset allocators will take a more longer-term view and start putting in money through traditional long-only funds rather than taking the temporary or easy way through ETFs. That is when the market will attain more sustainable rally than being parked in vehicles, which are easy to get in and get out.

To that extent, the long-only clients are circumspect because the nature of money that has come in can be quickly reversed.

Sonia: I wanted your thoughts on the auto space, because that has been the best performing space this month. Do you see the trends continue on the upside?

A: Yes, we have maintained our view that auto is going to be a structural leader in this market given the penetration levels and also, the short-term drivers in terms of the Seventh Pay Commission and a pickup in consumer discretionary spending. So, all the ducks are lined up if you are comfortable with valuations, that is the only issue in terms of short-term and that also, we have maintained that good quality companies, which you often find in this sector, valuations can be overlooked if you are taking a relatively longer term view. So, that is a sector that we continue to support.

Markets could be volatile if Donald Trump wins: UR Bhat

With no rate hike in the last US Fed meet, investors have shifted their focus to the geopolitical scenario, which is dominated by the US Presidential race.

As the two US presidential nominees, Hillary Clinton and Donald Trump prepare to go head-to-head today in the much awaited debate, the uncertainty this election poses has kept investors sceptical worldwide.

If Donald Trump wins, the correction won’t be too deep but the market will remain volatile as a potential Trump victory has not been factored in, says UR Bhat, Director of Dalton Capital Advisors.

In an interview with CNBC-TV18, Bhat said that Trump’s unpredictable nature and the lack of clarity on his policies can scare the markets if he is elected.

On the domestic front, he said that emerging markets like India will remain a favourite spot for foreign investors till the next US Fed rate hike.

He further said if foreign money continues to flow in, the market should trade in a range despite selling by domestic institutions.

Reema: The big cue that we will be tracking today will be the first presidential debate between the two candidates that will be at 6.30 am India time tomorrow and that might just kick-start the market’s attention to the US presidential race. Do you think that is a risk we haven’t factored in and it could lead the markets down till November?

A: Possible, if it looks like as if Trump is on the ascendency, markets might be unsettled a bit because the market seems to be feeling that it is Clinton all the way but the gap is narrowing and in today’s debate it looks like as if he is making a big mark on the ascendency.

Reema: How deep could the correction be if it is Trump who is voted to power?

A: I don’t think the correction would be so deep, it would be volatile. The volatility index (VIX) would go up quite dramatically because the markets have not factored in a potential Trump presidency and he is sort of not exactly predictable. So, therefore there would be a lot of difference.

Prashant: Although he has clarified that he doesn’t mind Indians.

A: That is one of the small mercies.

Reema: So, volatility, but not a correction?

A: Volatility yes, very high volatility but correction may not be — because there are further debates ahead and election is quite some time hence.

Prashant: How is the market going anyway irrespective of all of that because they have got a mind of their own, pretty much everyone recognises that it is very hard to find new ideas or even allocate money to relatively underperforming sectors? So, outperformer is 300 percent and underperformer is 150 percent. So, what do you do?

A: You should expect that as long as emerging markets (EMs) continue to be favourites of foreign investors, which is likely to continue till US interest rate hike happens. So, the market would continue because it is nobody’s argument that the markets are cheap or there are huge pockets or value somewhere. Everybody is of the view that the markets are a bit expensive. But you cannot argue with the flow of money. So, if the flow of money continues despite selling by the domestic institutions, the markets would continue to be at least trading in a range as we have seen for the last several months now.

Reema: And after the range?

A: After the range whenever there is an interest rate hike in the US, there are so many risks around — there will be election very shortly and after that if something like a Trump presidency happens there will be something like a Trump presidency happens then there will be huge volatility, even correction because at least till he makes his state of the union address people will not know what his policies are. But it will unsettle markets quite a lot.

Prashant: Road construction is very well advertised, there is nothing new which people don’t know about, how road orders are awarded, what is the pickup per day, what is the road construction, Nitin Gadkari himself is one of the most vocal speakers. Now, in a sector like that, there are many companies, and I was talking to somebody, there are many companies, old relics, which were grappled by lots of debt issues from the last bull market essentially, which got trashed 80-90 percent, which have risen quite a bit now, 50-60 percent but where market capitalisations are still a fraction of what their current annual revenues are. Sector wise it is the right sector, one of the very few sectors where there is visible momentum but do you think one should look at those kind of opportunities, explore a bit more, do some more research?

A: Certainly it calls for further research because there will be certainly winners there but we don’t know whether they are the ones, which already run up or the ones which have been left behind. It all depends on the flow of orders and the way they manage those orders because there are quite a few orders which may end up making losses. So, therefore this is very difficult for us to estimate, which are the ones that are going to be potentially very lucrative because quite a lot of that depends on — just EPC, it is fine but if they are doing tolling then it depends on how the flow of traffic is.

These are very big risks to take and typically these are ones, which land up with insurance companies because they are 30 year sort of annuities and nobody wants to hold these 30 year annuities who are in EPC business. So therefore how the exit happens is also very important because quite a lot of it these companies are saddled with these annuity sort of assets which they don’t want to hold.

Reema: Reliance has suddenly become fashionable, your thoughts on Reliance Industries as well as other stocks that you think look attractive at current levels.

A: There is a huge disruption taking place in telecom, so therefore, that is not the sector that one should place big bets on, especially with the auction and the money that would go into buying spectrum. So, that is something that probably is best avoided. But otherwise, it is more of the same, given the state of the market, given the trading range in which the market is.

Reema: So, consumption, banks?

A: Consumption, private sector banks, non-PSU financials.

Reema: Any non-crowded trades that you would recommend because all that you have mentioned have done well and are very crowded.

A: Very crowded, no doubt about it. Non-crowded, probably capital goods, because these are the ones which have not done well, but these are the ones, which might bounce back if the economy really turns around, maybe even some fine chemical companies. This is one area where there could be some movement. They are not exactly ignored but they are relatively lower down in the valuation spectrum.

Broader long-term India story intact; like pharma, NBFCs: UBS

As a base case, we do not expect a strong recovery for the Indian economy but the market expects so, is the word coming in from Gautam Chhaochharia, Head-India Research, UBS Securities.

However, the broader long-term India story is fairly robust and remains intact, says Chhaochharia in an interview to CNBC-TV18. So long-term investors need not worry, but shorter-term, the market is richly valued.

For the market per se, as a base case, the house has a year-end target on Nifty at 8000 and an upside target of 8,800. Base case for 2017-end, the target is 9,400, he adds.

According to him, if the market is expecting a good recovery then spaces like NBFCs are likely to do even better because even when recovery wasn’t good, they had delivered good growth and return on equities. He says the house has a overweight on non-banking financials (NBFCs), However they are no longer attractive on absolute valuation terms but on relative terms they are still good.

He thinks companies that are into data and petchem, oil and gas would do well. The house is also upbeat on the agri-theme and think entertainment is a secular theme. Entertainment as a space has held its ground despite a sluggish broader economy and relatively sluggish discretionary, he adds.

As a defensive play, he is bullish on pharma space. He likes pharma also because a lot of pessimism has been priced-in into the stocks.

Anuj: You have been a bit negative on market for some time now. Your Nifty target is quite aggressive on the way down, do you see this market now at the risk of having topped out a bit?

A: Sort of negative call on the gross domestic product (GDP) and the growth recovery is playing out in India where growth has been a bit sluggish and disappointing.

On the other hand, markets have continued to rally up and that is why we try to attribute the reason behind this. So one big reason is obviously what is happening to global interest rates and the hunt for yield apart from the interest rate coming down in India.

However, theoretically if you look at the framework we have, typically a lower interest rate also coincides with lower inflation, which should theoretically in longer-term mean nominal growth is also lower. So the discounted cash flow (DCF) or the net present value (NPV) should not be impacted. But in the practical world, when your yields go down and when you are looking at a world where a lot of the sovereign debt is negative territory then there is a hunt for it. That is what is helping emerging markets, that is what is helping India.

If you look at India — what you mentioned about India this week but even year-to-date (YTD) India has underperformed emerging markets in dollar terms while the correlation with emerging markets and global markets is near all time highs. So clearly, the global factors, the global lower rate factors is helping India markets per se a lot. This is a largely price to earnings (P/E) multiple of rerating not the earnings growth playing out.

On the other hand, the markets are expecting a reasonably strong second half recovery. That is where the key would be for the market direction into the next couple of quarters.

Sonia: The pocket that did well this week and that everyone is buying into these days is consumption. We saw lot of auto stocks Maruti, Eicher Motors, TVS Motor hit new highs this week. What is your own view? I see that you do like a lot of consumption stock especially in the midcap space but do you see more value here?

A: Top-down framework suggests that the recovery hope from consumption second half by the market will likely bit disappointed primarily because in our view, monsoons and Pay Commission — the two big drivers of this growth — are likely to have far lesser impact than the market believes in. We just released our annual survey. So we run a survey of consumers, which is done by our market research agency every year across India. This is the third year we are doing it. It is an urban survey pre-festive season across fifteen cities and that survey suggests to us that the pace and scale of recovery in urban demand in second half is likely to be similar to what we saw last year rather than a big acceleration.

Also in the Pay Commission side — the other big hope — our survey suggests that most of the government employees are likely to save most of the increase from Pay Commission rather than spend it.

Anuj: The sector which has been doing well is non-banking financial companies (NBFCs) and so many stocks — do you justify these price to book value at this point or do you say that the return on equity (RoE) has been so strong for some of these companies like Bajaj Finance, how do you approach this pocket? Staying out hasn’t helped but valuations clearly are not on your side.

A: We remain overweight on non-bank financials also because of the view on interest rates etc but having said that in absolute valuations obviously what you said is correct. They are no longer attractive on absolute valuations per se. The relative valuation still remains attractive given where the overall markets are.

You have to remember that over the last couple of years, where growth recovery hasn’t been that strong, these companies, this sector has delivered a superior earnings growth in RoEs. So if the market on one hand believes or expects a strong recovery in growth rates in India, which is not in our base case but that is what the market is expecting then this sector should do even better.

Sonia: The other big stock of the week was Reliance Industries. After so many weeks, finally we saw some outperformance here and now Reliance is up 15 percent in the last three months. I notice that it is one of your preferred companies in your list, what do you see as triggers for Reliance hereon and in the space particularly why would you be bullish?

A: I cannot talk about individual companies but in general, the relevant themes are the data boom in India, which should play out in our view without causing material disruption to the profitability of the broader ecosystem and the oil and gas, petchem cycle is still largely supportive.

Anuj: Looking at some of your other top picks, there are a couple of agricultural themes which you have and couple of entertainment stocks, what kind of themes do you see playing out in some of these stocks going forward?

A: In general, agri theme is about monsoon specifically while we do believe that the impact of monsoons on broader economy and consumption is likely to be much more muted than what the market wants or expects but specifically in the area of agri inputs, that particular segment has had been much more stressed and even a slight improvement does have a much more disproportionate impact on that segment because supply chain, working capital, debt levels etc. So that is the reason why we think that that segment looks good to us.

Entertainment has been one of the secular themes and we are seeing that segment again over last couple of years to three years despite a sluggish broader economy and relatively sluggish discretionary. That is one segment, which has held on reasonably well. Therefore, the outlook in most scenarios going forward is quite comforting for that segment.

Sonia: The next trigger that we have domestically is the earnings season and a lot of people believe that not just the second half of the year but even Q2 you could see a goodish bit of recovery in earnings. What are you forecasting for this season itself and which are the pockets that you would be bullish on?

A: We don’t want to have a forecast ready for Q2 but broadly for fiscal year 2017 forecast is 10 percent growth for Nifty while the street is at 16 percent. So we do see earnings cuts and that is where the survey gives us confidence to our framework.

Sonia: Since you are a bit cautious on the market, just wanted to understand what your recommendation is to long-term retail investors watching right now. Do you recommend them to just keep their powder dry and not invest much because they will get better return or better investment opportunities over the next three-six months?

A: Cannot make specific recommendations for retail investor but generally speaking, the India long-term story is definitely intact despite the concerns around short-term that is more against the markets exuberant expectation and what is priced in but the broader long-term story in India is fairly robust and remains intact.

For long-term investors, I won\\’t advice any major worries. Near-term yes, the markets do look quite rich and even if I peep into one year forward and see whether markets could be at the end of 2017, which we feel they will start pricing in what happens in FY19 even then the market risk reward seems more balanced versus now but still at the base case, looks like offering single digit positive returns, which is not necessarily the best option given the higher risk involved in equity markets.

Anuj: Your financial year end Nifty target is 7,700. Do you see that still playing out?

A: Our target for December 2016 is 8,000, which is a base case. The upside scenario is 8,800, which is where the markets are. Our base case scenario for 2017 end is around 9,400, which is where I see single digit return from a one year perspective.

Anuj: If for this yearend, your target is still a bit aggressive on the downside the bearish scenario, do you expect some bit of positions in defensives like pharma as protection or do you think even that is going to fall if the markets indeed make a move downward?

A: For markets to make a downward move, two things need to happen. One is earnings and growth has to disappoint and secondly, some bit of global factors about interest rates has to play out. But even otherwise, we are overweight pharma from the defensive market perspective and also in absolute terms also because in our view a lot of pessimism seems to be getting priced in into these stocks.

Earnings to grow at near 10%; RBI may cut 50 bps by Oct: Enam

A catch-up trade is happening now on back of liquidity, believes Sridhar Sivaram, Investment Director at Enam Holdings. But, he adds that this liquidity will not continue forever and earnings will have to come through.

Enam expects earnings growth to be around 10 percent for FY17 unlike other brokerages that are estimating growth of mid double-digit growth. Any dip in the market with expectations of earnings following through will be a buying opportunity.

Speaking to CNBC-TV18, Sivaram said that a 25 basis point hike by the US Federal Reserve in December is already priced in by markets.

Sivaram expects the Reserve Bank to cut 50 basis points by October this year on back of positive inflation numbers last month.

Among sectors, Sivaram is positive on cement, banks in short-term and insurance companies. The house is underweight on IT space, but certain stocks can be looked at, he says.

Latha: The liquidity has taken the market very close to new highs. Are you comfortable buying?

A: I think we have to put this in context that if you see emerging markets for the year, is up 16 percent and India as of yesterday is up about 8-9 percent; this is Morgan Stanley Capital International (MSCI) dollar returns. So, the liquidity is very strong and it is coming through in emerging markets, lesser so in India and more so in many of the other markets. So, many of my friends who are managing emerging markets, the question they ask me is why is India not moving up. So, I guess there is a catch up trade which can happen as long as the liquidity continues. However, as of now, India is actually underperforming the emerging markets and which is sore point for many emerging market fund managers because India is a consensus overweight and it is up 8-9 percent emerging markets. If you see some of the larger markets, there are up 20-25 percent, I am leaving Brazil which is up 65 percent, even if you take markets like Indonesia, Korea, Taiwan, many of them are up 20-25 percent. So, I guess there is a catch up trade here but I am not very sure if so much will happen because the starting points are different. India did outperform if you take a three year view.

Latha: Is that the wrong index we are looking at, is the money likely coming in midcaps which is up about 20 percent year-to-date (YTD) or metals, or public sector undertaking (PSU) banks, they are all up about 20 percent YTD?

A: Which is right but if you take any large investor in India and look at their portfolios, it is very difficult to put so much money into those midcaps. So, if money does come into some of the largecaps including say in IT, pharmaceutical or some of the fast moving consumer goods (FMCG) companies, you can then reallocate your portfolio slightly here and there based on, if you think you are bullish on financials, PSU banks or whatever, but large part money does come into some of those larger names. So, it is difficult to believe that many of the fund managers would have zero weight in IT and everything in financials or PSU banks. I don’t think people manage money that way.

Anuj: The interesting bit is what about liquidity going forward because sooner or later Fed is going to hike rates and sooner or later Reserve Bank of India (RBI) is going to cut rates as well. How do you see the liquidity panning out for our market because truth be told, earnings have still not improved and it has been a liquidity driven rally. So, what is the risk for this market in terms of that liquidity?

A: I think the earliest one is expecting Fed to hike is sometime in December. The consensus is that may not be more than 25 basis points as of now. So, up to 25 basis points it is reasonably well priced in I would say within the markets. I don’t think there will be too many issues as far as liquidity is concerned as long as it is 25 basis points. I think the commentary is more important than what the exact hike is. I agree with you that liquidity cannot continue like this indefinitely and more importantly the earnings have to come through.

We have seen two years of hope that the earnings will come. We have seen very patchy growth as far as India is concerned, green shoots for three months and then we don’t see any follow-through on that. Maybe we are coming to an end of that because from the government standpoint some reform measures have happened; many building blocks are in place. I am still not very gung-ho on earnings for the current year where consensuses is still 16-17 percent. I think the number is going to be closer to maybe high single digits or 10 percent but possibly maybe we are better positioned for next year than this year.

Latha: What was for your universe or stocks that you watch the earnings growth in the first quarter?

A: First quarter numbers, if you take the aggregate, it was like 4-5 percent. However, then people then say okay, remove financials, remove this. I am not a believer, if I want to look at the market earnings, I will look at it on the whole. But obviously, there are sectors where you would not be investing, where you think there is not enough growth. If I look at the growth stocks, then they are north of 15-16 percent but then they are also priced for perfection. So, it is a tough balancing act that one has to look at.

Latha: One of the near-term factors, and it has gotten a little nearer now, is the Budget. 40 percent of the revenues have been taken out now and that will be in the goods and services tax (GST). Will you once again get those tantrums from the market because of this capital goods issue? I am asking you because Shaktikanta Das met a lot of foreign institutional investors (FII), so is the tax bogey likely to once again mar our happiness in January?

A: You are talking about the capital gains?

Latha: Yes.

A: I think the capital gains issue is an issue which will come up again and from whatever discussions you have in Delhi, this has really not gone away and this has to be kept in mind. The policy makers are quite encouraged by the fact that the market’s reaction for the Mauritius and the Singapore tax treaty renegotiation has been very benign. In fact, it would say that it has not reacted at all and the market moved on from there.

So, that has surprised positively and this may not be that great because now they think that or at least that is the view that they can impose capital gains and the market will take it in stride. Maybe yes, but one has to move beyond capital gains and look at earnings. If the earnings are strong, market will take that in their stride.

RBI’s 4% inflation target doable but hard to keep: Credit Suisse

Credit Suisse continues to retain its expectation of a 25-basis-points cut by Reserve Bank of India (RBI) in December, said Asia Economist Deepali Bhargava. She was clarifying on a report by the firm’s equity team saying rates could be down even 100 basis points.

On a structural basis there are still pressures on a lot of categories except cereals, she says in an interview to CNBC-TV18, adding, while inflation trend below 5 percent on sustainable basis is unlikely there could be a “touch-and-go” dip to about 4 percent for some time.

From first quarter next year, though, inflation is likely to move back higher closer to 5 percent. If they (RBI) is really serious about 4 percent target then they should look to sustain it, she says.

She also shared her views on the new monetary policy committee saying any guidance on near-term inflation by the committee will be meaningful.

Anuj: What is the main reason that you see this 100 basis point rate cut and what are the timelines that you are expecting this 100 basis point rate cut?

A: That is not really the view that we have. That is the equity side view and what they are highlighting is more on the wholesale rates. Our view remains of a 25 basis rate cut and we are looking for that to happen in December.

Latha: Your strategy team is not expecting that 100 basis any time soon, they are pushing it out into 2017. What is your own sense of food inflation which they strongly argue because of an excellent kharif output, lower cereal consumption normally in India and lower rural wages, is your thought also that food inflation is going to remain poor all through 2017?

A: On a structural basis, we do see there is still pressure on a lot of categories except for cereals. So, while the trend inflation below 5 percent on a sustainable basis is somewhat unlikely, we do expect a dip in inflation to a reading of about 4 percent. However, we think it will be more of a touch and go and with Q1 2017 coming in, the trajectory should move up from about 4-4.5 percent back in the range of 4.8-5 percent as you have your pay commission housing allowance, etc coming in which is our expectation.

So, I think the entire idea is, if they are really serious about the 4 percent inflation target, they should look for it to sustain which we think is still pretty unlikely. Another factor that one must remember is that, cyclically, majority of the disinflation is likely over, more from a commodity perspective and also because if you expect further rate transmission to happen which should mean higher consumption at a time when investment is still contracting. So moving to 4 percent is still difficult.

It may happen but that is not really our view. As of now, for the year, till March 2017 we have one rate cut of a 25 basis point.

Latha: Separately the monetary policy committee (MPC) members are now known, fixed term of four years, non-renewable and people with academic leanings. We don’t know of them being representing any other interest group. What is your comment on the MPC?

A: The constitution has made one thing very clear that some of the market was expecting that deliberately the government could introduce more dovish members into the committee. I think those fears are alleviated. Like you mentioned, all of them are academicians with distinguished background. However, one thing I would like to highlight is that except Chetan Ghate none of them have been like a practitioner on a monetary policy and we have been trying to highlight the fact that other country experiences suggest that a divergence in external and internal member votes may happen only after a while.

With two of the three appointees being a non- practitioners, it is all the more likely that they will likely vote in-line with the internal members and in a way because it is a six member committee and RBI Governor view will continue to remain paramount at least for the first leg when this gets introduced.

Latha: What do you expect the Governor’s view to be, since it is a new Governor anyways?

A: I think they should pretty much stick with what they have been talking about. I think what I am really interested within the entire inflation framework that Urjit Patel and the committee talks about is what are their comfort range on real rates and the guidance on near-term inflation target. So, we know it is going to be 4 percent over a medium-term but guidance on near-term inflation will be pretty meaningful.

One thing which is still not very important but whether the new MPC would also have some control on FX policy because that doesn’t get talked about so much but that happens in some countries., so, if it is just a rate decision or FX policy. However, in terms of the Governor’s view we are not looking for a rate cut in October. I think he would want to wait for further moderation in food inflation and December should be when he should be able to cut.