Jul 09, 2013 01:56 PM IST | Source: CNBC-TV18

Mkt upmove only temporary; dire need for reforms: IIFL

Nirmal Jain of IIFL says the measures taken by the market regulators to bring in some semblance of stability are only temporary and the government needs to take corrective policy decisions to boost the market sentiment.

The Indian equity market is in the green today, thanks to a recovering rupee. The home currency gained 43 paise to 60.18 per dollar in early trade today. Nirmal Jain of IIFL, however, says that the upward movement is only temporary and one should continue remaining cautious.

Additionally, in an interview to CNBC-TV18, Jain says the measures taken by the market regulators to bring in some semblance of stability are only temporary and the government needs to take corrective policy decisions to boost the market sentiment.

"India's growth story is still better than Brazil, China or Russia, but it has been frittered away by complete policy paralysis as well as indecision at government level. Government is just preparing for elections as we have seen and food security bill is another problem," adds Jain.

Below is the edited transcript of Jain's interview to CNBC-TV18.

Q: Are you feeling cautious about the market given the news flow that has come up of late from both global markets and from our internal macros?

A: Yes. One has to be very cautious in the market. Today, the market has moved up little bit because global markets were better and gold imports had fallen and Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) and other regulators had taken certain steps to help the rupee.

The margin on the currency context also has been raised. But these are all temporary measures, they don't solved the structural problem. I am a bit cautious and concerned for two reasons. Firstly, emerging markets (EMs) in general have not been doing too well. Infact in last three years, if one looked at the outperformance of developed markets vis-à-vis emerging market; it is a whopping 55 percent. So, most of the global investors are waking up to this complete disbelief that growth has been higher, the developed markets have done so much better in dollar terms.

Hence, money is flowing out of EMs and that is why we are seeing Exchange Traded Fund (ETF) and index funds selling. On top of that, India's political situation is not very encouraging and foreign investors are not very enthused by the way our government is not at all worried about grim situation that is existing on the ground. We have still not approved FDI proposals, pharmaceutical sector, even elsewhere when rupee is so precariously poised at this point in time.

Although there was an opportunity because India's growth story is still better than say Brazil or China or Russia for that matter. But I think it has been frittered away by complete policy paralysis as well as indecision at government level. Government is just preparing for elections as we have seen and food security bill is another problem.

What will happen with this as Finance Minister tries to contain the fiscal deficit? Planned expenditure will come down further and that means that investment cycle which has been called up for last three years will continue to remain so.

No new employment has been generated in last one year and India is adding almost 12-15 million people to workforce every year. So, all these things don't auger well and the government needs to do something decisive, very quickly now. A sense of urgency is something which is missing at north block and we had an opportunity to control this damage, contain this and make sure that we don't get hurt as much as other countries in the EMs will be. However, at this point in time, one has to be very cautious and watch all the developments internally as well as on the global front very carefully.

Q: It is often difficult to exit from our market in a rush as well because of the impact cost that people face on their positions. Is it your sense that this outflow situation is going to carry on in a consistent fashion and for much longer where the market keeps seeing these steady outflows?

A: On a debt front, there has been USD 6.5 billion outflow in last one and half months which is higher than the net inflow in last one year. The total FII debt is about USD 50 billion out of which may be USD 6-7 billion is already redeemed. So, even if one sees some redemption there, there will be tremendous pressure on the rupee and total external debt is about USD 390 billion but this kind of a situation for the rupee is not good. Even the other lenders, whenever they mature may not renew the debt and that is where the risk is.


In equities, we had an outflow just about USD 1.5 billion. The problem is that even if there is a small outflow, the situation is very fragile and that is why we need very desperately certain measures which actually change the sentiment of foreign investors. So, even if there is a couple of billion dollars more, I think we are very helplessly poised because there is no money coming from domestic investors. If there is a small outflow on equity front or continued outflow on debt, then our currency is looking very fragile and that is the main cause of worry.

Q: What do you do with call on the rupee now? It is still at 60 plus despite the measures which came in from Sebi. Do you see that inflicting more pain on the general corporate sentiment and market sentiment?

A: Yes, I think so. It is at 60-61 against the dollar and whatever measures we are talking about, they are technical, there is nothing fundamental or structural that will be heard from the government that they want to get more FDI or they want to do something like say import dumping duty to make sure that wherever we have spare capacity, atleast we don't import.

We are not seeing anything which will promote exports or contain imports in any meaningful manner or also encourage flow of capital which is little longer term, which will give some time for the government to get import-export balance or CAD right. So, all the steps RBI and Sebi are taking are technical and they have very limited life in terms of effect on the market.

If the fundamental problem is not solved, then again we see slight problem in rural market and our currency again starts tumbling. That is a very scary situation because from here if rupee tumbles further, then the entire confidence of investors can be shaken and it is common knowledge now that markets are all hinging up on the investors confidence.

Q: Have you changed your view on how much by way of rate cuts one can expect from the RBI in the second half of this year because that was one hope that the stock market was clinging on to and the bond market was doing quite well on. But have things changed on that side as well?

A: I think so. Hopes of rate cut are also diminishing because RBI stance has been very clear that if inflation is high, then they will keep the monetary policy tight. India is in a very strange situation because on one hand productive capacity has not been created because of various things, which is high rate and investment sentiment and on the other hand, the government is doling out lot of money in the consumers hand particularly rural and also urban poor. So, there is a huge consumption demand and no productive capacity coming up. That either leads to import for consumption or to inflation. So, in this kind of a scenario, inflation will remain high despite low growth and whatever RBI stance has been, it looks like they may refrain from rate cut further or they will defer it. Therefore,  the rate cut may not happen as much as we thought earlier.

Q: Given all that you just said, what are the fears that the market might settle into a lower range during the second half of this year and not make it pass that 6200 level which people were talking about earlier?

A: I would say there’s a 50-50 chance but on the positive side if one just looks at few things that can go for India. India has been a huge importer of commodities. So, when commodity prices fall, commodity exporting countries like Brazil, South Africa, Indonesia get impacted and India’s corporates become the beneficiaries.

Other countries or other investment destinations in the EMs are not too great for investors. So, by default, India can get some money and therefore I would say there is a 50-50 chance that market may further go down or will remain at these levels. But on balance, it looks very unlikely that they will rally from this atleast till elections because the political worries will remain on top of investors. So, even if things improve little bit they may not sell but they will wait before buying in any meaningful or sizeable value.

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