It was another quiet day for the Indian market. The Nifty crawled back to the 6,000-mark, up 13.30 points. The Sensex gained 51 points and closed 19,742.52.
In an interview to CNBC-TV18, S Naren, ICICI Prudential says fuel price hike, RBI's policy on January 29 and Budget would be the next triggers for the market. "There have been statements that we could see a price hike in diesel of a rupee a month. If that were to happen in the next 10-15 days, it would be the first trigger," he elaborates.
Naren further says the market is eagerly waiting for a January 29 trigger. "People are almost sure that there will be a rate cut and the probabilities have risen substantially over the last few months," he adds.
After RBI's policy, Naren says, the next trigger would be Budget. "For 2013, we believe that the more they are able to cut fiscal deficits, either through increased taxation or reduced subsidies or reduced expenditure, to that extent, the market has upsides," he asserts.
Below is the edited transcript of S Naren's interview on CNBC-TV18.
Q: What is your sense with regards to the market? Where do you think the next trigger is coming from? Which direction is the likelihood of the Nifty going in?
A: There have been statements that we could see a price hike in diesel of a rupee a month. If that were to happen in the next 10-15 days, it would be the first trigger.
The market is eagerly waiting for a January 29 trigger. People are almost sure that there will be a rate cut and the probabilities have risen substantially over the last few months.
After that, you have the Budget. For 2013, we believe that the more they are able to cut fiscal deficits, either through increased taxation or reduced subsidies or reduced expenditure, to that extent, the market has upsides.
I think the old worries, which we used to have on crude oil, are all becoming much smaller at this point of time because US production has been going up. The world seems to have handled already a situation where Iranian production is pretty small at this point of time, maybe Iraq is compensating for Iran. So, I think some of the older worries like crude are behind us.
We now only have to worry about how we are able to tackle the issue of current account and fiscal deficit at this point of time.
Q: What are you expecting to see in terms of policy reform from the government? So far what has come in has been constructive, but the market seems to be greedy for more. What are you watching for? How soon do you think it could come through?
A: I do not think we are in a position to predict when it will come through. Starting January-February, last year, we believed that diesel price hike has to happen and it will pull the market up, finally it came in September. So, it was a pleasant surprise to see this whole idea of a slow regular increase in diesel and kerosene price. That would be an extremely positive development. At the end of the day, issue of increasing subsidies is the real issue which is dogging the Indian economy. So, any steps taken in that direction will be received very positively by the market.
Q: What is your sense with regards to foreign investors and their outlook towards India in 2013? We have been beneficiaries in 2012 with regards to a strong Foreign Institutional Investor (FII) inflow, but do you think that it could repeat in the same momentum in 2013?
A: We believe that we can predict the quantum of foreign inflows and the size of the foreign inflows. Actually, it is very difficult for people to actually predict the quantum of foreign inflows. If you were to see yields in US going up or if unemployment rate in US actually comes down sharply, it would be actually negative for flows to emerging markets. I think that part of it is very clear.
I think the buck is that we have to worry more about a substantial improvement in the economies of the West because I think we have already got a fair amount of flows based on the fact that India growth is much higher than the world growth. Now, we have to worry more if growth improves in the West rather than if it deteriorates. I think if it goes back to deterioration, the trends, which have played over the last three years of money coming in because of India growing much faster, should continue.
Q: After the kind of run up that we have seen in many sectors like oil and gas, banks etc, do you expect that to continue or would you churn your portfolio now?
A: Over the last six months, we have had a static view that about 15 stocks, in the market, look overvalued. The rest of the market looks cheap. Even though the rest of the market, which looks cheap, is going up, they are not costly by any sense of terms. Today, we complete five years of the market top in 2008.
If you see the performance of the stocks in the last five years between January 8, 2008 and now, you will find that the Indian market has seen a polarisation, about 15 stocks have gone up substantially from January 8, 2008 and the rest of the market has gone down. They have gone up in the last four months. There is considerable upside in all those stocks. We require lower fiscal deficit and lower current account deficit, if along with that you are able to see some more growth impediments being removed, there is still much more scope for all those stocks to get rerated. The 15 stocks, which have done extremely well from January 2008 till n ow, I do not think there is much upside left in.
Q: What is your sense in terms of policy? How much rate cut are you expecting from the RBI as a whole, on January 29, 25 bps or 50 bps? How much do you think is already factored into the market?
A: We always think that the Indian market moves only because of Indian reasons. We are all expecting rate cuts on January 29. The quantum will be a decision which we will have a much clearer grip closer to January 29. But we have to remember, in the last three months, all markets have done well. People were thinking that China will not do well, but even Chinese markets have done extremely well in the last three months.
I think there is a local factor, there is an international factor. What we like to see in India is very clear, lower fiscal and current account deficits. What we require for that is a fuel subsidy reform. That has been talked about again recently. That is an extremely big positive. Otherwise, people put in a lot of view only on interest rates. I do not think so.
I think the scope to cut interest rates in India is very high. It is not just the January 29th rate cut. But for the rate cuts to actually happen on a continuous basis we need to see lower current account deficits or lower fiscal deficits. If that were to happen, I think the scope to have rate cuts is much more than a few rate cuts in the first quarter. India is one of the few countries in the world with interest rates as high as 7-8 percent by the central banks. So, just think of the scope to cut interest rates. But we need for the interest rates to get cut only lower current account and fiscal deficits. That is not necessarily in the hands of the RBI.
Q: How exactly earning season will pan out this time around? How much of a trigger would it be for the market in terms of a movement?
A: We do not see any big pick-up in earnings at this point in time. We have seen that when currency depreciates quarter-on-quarter, with an exception of few sectors, the non-operating losses hurt earnings. In September, rupee closed at about 53, whereas in December it depreciated. So, the non-operating loss is likely to hurt earnings. The only benefit you are going to see is in terms of treasury profits in a few banks because ten-year yields have come off.
The earning season is not going to be a big reason for the market to get rerated. Infact we believe that it could dampen some of the stocks. But I do not think the market is going to look at the earning season. The market is going to look at reforms. If there is a feeling that reform will accelerate through this quarter and you are going to see a fair amount of disinvestment and primary market activity, I think those are going to be more material than the earning season. At this point of time, we believe that earnings will lag the market rather than be in advance of the market. So, I think you have economic parameters improve over the course next two quarters. I think earnings will improve subsequent to that rather than before that.