India is the only country among BRIC (Brazil, Russia, India and China) to have a current account deficit, , Senior Fund Manager, said. India needs to have a self-correcting mechanism as in Europe, he added.
Commenting on the market, he said that it may seek support at 14,000 levels.
Excerpts from CNBC-TV18's exclusive interview with Ajay Bodke:
Q: What is it that you expect to see now over the next few weeks after all that has gone by?
A: I think we expect the market to continue to remain under pressure in the short-term. Primarily due to the concerns on the macro-front, we were the first ones to flag off the problems with the ballooning of balance sheet liabilities continuing to impact the market and I think what we had envisaged then is more or less coming true.
In the interim we have seen some very marginal increase in the prices of gasoline, diesel and LPG, but the problem I do not think has really been fully solved because with under recoveries of Rs 2,45,000 crore roughly with crude price of around USD 130/bbl subsequent to that we have seen the prices touching USD 138-139/bbl.
Let us remember that every dollar increase in crude prices will continue to increase the under recoveries in the system by Rs 3,000 crore. Also with the package that was announced last week roughly Rs 40,000 crore of total subsidies have not yet been allocated and in addition to that we are looking at an additional USD 9/bbl increase in crude so roughly Rs 27,000 crore. So this is a problem I think will continue to have an impact on the sentiment in the market.
We need to have a self-correcting mechanism, which in economies like America or Europe is clearly coming to fore. It will see an increase in crude prices and it has already started to impact the consumption in these countries. However, in economies like India and China, which continue to subsidize heavily the cost of gasoline, diesel and LPG, I think that self-correcting mechanism is not coming into place and the consumption in these economies is continuing to grow at a very fast pace.
So we need to address the issue at its core, we need to see to it that some of the measures like largescale diversion of kerosene in diesel, secondly the run-away rise in diesel consumption due to oil PSUs also has been put to use as fuel in place of some of the other fuels that have imported market prices.
These are the supply side issues that you need to tackle if one needs to address these issues at its core. I would like to point one statistic i.e. 80% of the incremented demand for crude and its products over last five years has come from those economies that continue to subsidize heavily the consumption of these fuels.
Q: At what kind of valuation levels we will find some kind of a support this time in the slide? Are you looking at any benchmark kind of levels or valuations kind of parameters at which the markets might try to consolidate and bottom out?
A: I think a fortnight back we discussed that the markets although then were on an upmove. We had said that 14,800 is a level that the market we felt then could test and we are hovering ominously close to those levels. So that is the support level that the market will try to look at. However, if that reaches then one could see further correction overtime of at least 500-1,000 points but that will take overtime in the medium-term, I am looking at.
Q: There has been a lot of trepidation after the outflows last week. When you speak to colleagues, associates in your circles, what are you hearing about what’s happening with this FII participation?
A: I think year to date roughly we have seen USD 4-4.5 billion of outflows and these macro issues are having an impact. Let's not forget that among the BRIC countries, we are the only country that has a current account deficit Brazil, Russia and China all three of them have current surpluses. It’s an issue that is important because it’s only in such uncertain times, the concern that ever increasing current account deficit will not get financed through FII or FDI flows that’s when this trepidation as you mentioned comes into play. So this is an issue that we need to tackle.
Q: What about the interest rate situation? What are your expectations there, the market fears that there will be another move from the RBI and the entire rate sensitives have been underperforming. What’s your stance there?
A: I would like to point out that we were the first ones to say that the kind of crowding out of private sector investment - there is a possibility of interest rate moving up in Q3 and Q4 due to the macro issues. Hence we very much stick to our stance; we still feel that it is better to be in defensives, it's better to keep away from interest rate sensitive sectors like real estate, banking and financial services, and automobiles, better to be in some of the defensives like IT or selectively pharmaceuticals or FMCG.
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