Global flows are driving the Indian markets right now , says Dharmesh Mehta, MD-Institutional Equities, Axis Capital. Talking to CNBC-TV18, he says people are bearish on commodities globally which is good news for India, with both inflation and interest rates coming down. Though the global perception of India has gone down as far as politics is concerned, people are happy with the country’s fiscal situation. Going ahead, the market mood will largely depend on the monsoon, he says. But as of now, we are still dependent on what happens to global commodities.
Here is the edited transcript of his interview with CNBC-TV18
Q: 28-month high for our markets, coming off that 400 point drop that we saw on Tuesday. What's driving the Indian markets?
A: Global flows are driving the Indian markets right now and there is lack of supply in the market. So, you are seeing a global meltdown on commodities, people are bearish on commodities globally which is good news for India. This is because your inflation comes down and so do interest rates and that is what India needs at the right time. So, India is benefiting the most out of the global meltdown on the commodities side.
Q: You are speaking with a lot of foreign investors, now the view coming in from some foreign investors like JP Morgan for instance is that they prefer India over other emerging markets. They believe that India will outperform other emerging markets. What is the sense that you are getting from FIIs in terms of the India story, how bullish are foreign investors feeling about Indian equities and has there been more appreciation of the policy environment? For instance, the move on hiking diesel prices, some FIIs seem to believe it is not been fully understood or appreciated?
A: That is true, people are happy with whatever the government has done to fix the fiscal situation. So, no complaints on that part, but politics have let down people. So, there is an anti-India image or the perception of India has gone down as far as politics is concerned. However, as far as fiscal situation, India is done a good job and people are happy with that.
The finance minister was here in London a few weeks back and he is also briefed the investors on the efforts of the government. So, overall they are happy with the efforts on that front and as I told you, the global prices coming down on the commodities is helping India’s cause. India was a big play if the interest rates go down and that is what is been happening and people are predicting that to continue to happen.
Q: Do you believe that we are in a midst of a breakout rally? And do you believe that the Indian markets are going to top new highs from here on?
A: I think so. We are going to get into a volatile month, which is the June-July where people start looking at the rain god. So obviously, what happens on monsoon will play a big role on whether we breakout into a new 20,000-30,000 kind of a range that will depend if we have a great monsoon then obviously higher chances for that to happen. But as of now we are still dependent on what happens to global commodities.
Q: While monsoons and global commodities are one side of the picture that the investors are looking at, they are also now betting on Reserve Bank of India’s (RBIs) ability to ease monetary policy more aggressively given the inflation data, we saw being announced on Tuesday. On the back of that we saw the rate sensitive’s move very sharply. So how much of a rate sensitive’s play do you expect over the next few weeks for instance?
A: It will definitely be a rate-sensitive play over the next few months, not only weeks, because the valuation of those stocks has been beaten down drastically. So, it is not as if they have gone up like 5-10 percent or 15 percent and that is it. If you see a continuous fall in interest rates or global commodity prices and a great monsoon obviously those stocks have much upsides. So, it will stay for much longer than few weeks if everything turns out the way people are predicting today.
Q: Given the macro economic environment which looks positive at this point in time and of course if global liquidity continues to be supportive of the Indian equity markets, what levels are you going to be watching?
A: It is tough to predict a level in such a volatile environment. We are dependent more on the external factors and rain gods. So, I rather not look at it, I think we take an event at a time. Let’s see what happens on the MSCI re-weightage which is supposed to be expected on June 10 or 11 and that’s when you will see whether India goes up in the weightage in the MSCI index. If that happens, you still see more global flows coming to India.
The second event is going to be the rains – the monsoons. If the monsoons are great there will another spike in the market and eventually the RBI continues to cut rates and inflation trends downwards, so there lots of events to watch out. Let’s play an event at a time rather than trying to predict what is going to happen.
Q: Which are the sectors that you are going to be backing? Which sectors do you expect to outperform the markets?
A: It has to be banks, infra, power, real estate, these are the ones which benefit the most of a falling interest rate cycle. Also those stocks have been beaten down. So, I would be betting on those kind of names. I am assuming that the global commodities remain bearish and oil and gold continues its fall.