Amar Ambani, IIFL feels that the key event market will now watch out for would be upcoming elections. "Election will be a good event for the market. This election will clear many hurdles because the elections reset the system," he told CNBC-TV18.
Though there are some positive signals on the macro front for India, like down trending inflation and fall in commodity prices, but headwinds like weak gross domestic product (GDP) growth and fiscal deficit remain, he added.
Meanwhile, he expects the Reserve Bank of India (RBI) to oblige the market with a 25 basis points rate cut in June, but for the rest of this year, there may not be any rate cuts, he expects.
Below is the verbatim transcript of Amar Ambani's interview with CNBC-TV18
On equity markets
It has been a big uncertain period for our market which lasted longer than expected. Generally, people make back of the hand calculations and think that possibly for five years we will have bull market and then for four years we will have bad market but in reality, it is not so simple, he adds.
When crisis emerged in 2008, the world economy was in trouble but China and India were the two shining standout countries. There was talk about China and India leading the next growth wave. However, today we are faced with a situation where in some corners of the world there are some greenshots, some positive data points emerging and India, China in fact are both slowing.
Key events to watch:
Election will be a good event for the market. A lot of people talk about elections bringing a lot of uncertainty. However, this election will clear many hurdles because the elections actually does is, it resets the system.
Currently, it has become difficult for the government in power to functions because of too many hurdles and scams. For example there is an Anna Hazare or an Arvind Kejriwal raising some allegations somewhere. Then you the Bharatiya Janata Party (BJP), in the opposition constantly talking about corruption, disrupting Parliament and all kinds of things. Also so many scams have emerged that it becomes very difficult for the government to function.
Post elections, if a Congress led government (even if it is a coalition) comes back in power then they will think that people of India have given them a clean chit and they can start with the reform process.
If it is the other way round and if BJP led government comes into play, Ambani says, “All the people who are shouting at the top of their voice and corruption charges and things like that will go quiet for a while because you need to give the new government two, three years to do something before you can start charging them with corruption etc.
Therefore, he thinks elections it will be a good event for the market. However, he feels till elections not much can be done. The Congress is trying to push through as many reforms - maybe because it is a crisis and not because they are self motivated. So, when there is a crisis like situation it is the best time for reforms to happen because there is no other option available and more so because if a global rating agency downgrades India, then we could be heading for trouble.
Therefore, the Congress government will try and push through whatever they can but doubts much can happen in this limited period because they have to manage deficit, they have to manage coalition partners, they have to manage their current allies, they have to prepare for elections and there is not just a general election coming next year there are also some very important state elections coming up.
I don’t think too much constructive can happen in the next few months but at least one can hope that after elections things will look up.
Second positive is the fact that inflation has started to surprise by tapering off significantly. The recent wholesale price index (WPI) data that came in - people were anticipating that the trend will be lower but it surprised even further and the trend being lower because the weightage of metals in WPI is quite high.
The encouraging part is that the consumer price index (CPI) also declined by 150 basis points over the past two months, says Ambani.
However, the problem currently is that although we already had 75 basis points repo cut this year, hardly 5-30 basis points have been passed on by the banks in terms of rate cuts to their customers. It could be because there is a liquidity crisis currently, he explains.
This entire monetary transmission of this 75 basis points cut has not happened. As far as consumption is concerned there are signs of moderation and if that is the case then you can only hope for inflation to fall further, believes Ambani.
Going by the recent trends in the inflation data that has come out the Reserve Bank of India (RBI) Governor might just oblige the market and announce another 25 basis point repo cut in the next policy meet.
However, post that he might just maintain status quo for the rest of the year and will wait to see more on the inflation front. He will wait for the current account deficit to correct and wait for the monetary transmission to take place.
We will get this 25 basis points cut and then there will be no more cuts for the rest of the year. Although, there is a possibility that if this downtrend of inflation continues, then in January to March next year you might actually get a 25 or 50 basis points further cut, which means 75 basis points more on the already 75 basis points announced till March of 2014.
Third positive is that this huge super cycle that the commodities were enjoying, and the up swing in commodities might have come to an end.
He says, if you look at any of the commodities be it gold, oil etc they have risen multifold. However, now, with the US shale gas discovery, the case for an oil increase or even oil being at current levels is not that strong. So, one can actually look forward to times where crude oil is at the same level or marginally at least lower. The US is also open (Obama has already mentioned) to exporting this shale gas and if that is the case then surely the world can benefit with this huge discovery that US is made.
He adds that China too is slowing down. The reports by people who track China, who track other global countries is that the Chinese exports are suffering now because global economy is suffering and therefore Chinese exports can’t take off. Therefore, the Chinese domestic consumption cannot grow any faster than what it already is because it is growing at a decent pace. Therefore, he adds, “China is clearly faced with a big problem where it cannot substitute its exports slowdown with anything else and at the same time the per capita gross domestic product (GDP) or per capita income of China is now gone to a level from where the likes of Japan and even the other countries, faced some kind of tapering off of growth when they reached that stage.” Even the coal consumption also in China has been slowing. So, all of this kind of augurs well for commodities and if that is the case then we could see some relief on the inflation front and on the current account deficit front.
Headwinds faced by India
Although above mentioned factors are positive for Indian, it does face multiple headwinds. While, I say that the current account deficit might correct a bit, it is important to know that in absolute terms India’s current account deficit is the second largest in the world currently.
It is only number two to US, and slightly higher than Britain. Even with cool down in commodity prices, even slowdown of consumption if you have a scenario where say USD 20-25 billion savings take place on the current account deficit you are still talking about a good USD 65-70 billion of deficit, which needs to be funded.
Currently, even if the foreign institutional investors (FII) inflow which is coming is USD 13 billion or USD 15 billion and you could maybe further get another 10 or 20, there is still USD 40 billion or so gap to be filled.
So, this is one big problem that India is facing and according to a recent report by S&P that it is not going to upgrade the outlook or the ratings and it continues to watch out on what India is doing and continues to maintain its concerns.
Chidambaram he controlled the planned expenditure and he got the figure that he wanted. He is also projected a figure for next year which is 5.2 percent, which is again a mathematical calculation because there has been some high estimating of certain revenues.
At the same time, there are some expenditures on the non-planned side which have been kind of subdued including subsidies. So, all that will balloon and you will either get a fiscal deficit which is 5.5 percent or if you want to achieve 5.2 percent then you will have to again cut down on planned expenditure spending which means GDP growth is affected.
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