However, FCNR outflows have been a concern for the rupee, says Nilesh Shah, MD, Kotak Mahindra AMC.
According to him, consolidation will set in once global interest rates start firming up. "Slightly rising yields and speculation about the Federal Reserve raising rates, are going to bring consolidation to the Indian markets," he told CNBC-TV18.
Meanwhile, the correction is going to be stock- specific, he said, adding fundamentals of private sector banks continue to be healthy. "Private sector banks weigh over non-banking financial financial companies (NBFCs) and public sector bank (PSU) banks," Shah said.
He believes India's rupee and bond markets more comfortable than equity markets.
However, he said foreign currency non-resident outflows have been a concern for the rupee and India's 10-year yield is indicating it has priced in RBI action. Not just this, continued open market operations (OMOs) indicate that the new Reserve Bank of India (RBI) Governor will maintain earlier policies.
Difference between the Indian yields and US yield is quite large and hence, there is enough room for action, Shah added.
Below is the verbatim transcript of Nilesh Shah’s interview to Prashant Nair and Ekta Batra on CNBC-TV18.
Prashant: What do you make of the fall that we are seeing, start of something bigger or just a routine correction?
A: It is a slightly deeper correction than what we have seen today. Globally interest rates have started rising. The 10 year US yield which was hovering at about 1.4 percent is now about 1.6 percent. Now 20 bps might look like a small number but on a base of 1.4 percent that is almost 10 percent move. Now, as we see a different scenario of slightly rising yield and probably central banks around the world talking about raising interest rates that is going to put some amount of consolidation phase in our market and we do expect some amount of correction to continue but it is a correction in a consolidation form. Markets have run up since February 2016. So, it is important for them to take a pause, correct little bit so that they can jump later on.
Ekta: The correction that we have seen in the select private banks in the past couple of days do you think that the valuation comfort now is much more than earlier or do you think there is more to go in terms of a correction?
A: It is going to be far more stock specific and one thing I would like to state is that if you are up 100 percent then come down 20 percent, it is not a crash, it is not a correction, it is just a minor adjustment. So, in private sector banks we still believe fundamentals of business justify overweight of private sector banks over public sector banks (PSBs) and Non-Banking Financial Company (NBFCs). If we see the NBFC sector majority of those companies are trading at even premium to the private sector banks and keeping that valuation in mind we still think PSB is a buy but it is far more stock specific. We will have to evaluate the current valuation in line with the historical trends and what kind of growth rate market is factoring in.
Prashant: In terms of assessing the impact on the Indian market both on the equity and bond side just allude to the bond picture as well, the bond side as well the debt as well. If as expectations rise of central banks increasing interest rates how is the market going to hold up. The rupee has been remarkably stable, foreign direct investment (FDI) inflow has been strong, current account seems to be in pretty good shape, almost on a surplus in the future maybe, small surplus maybe. So, could all those things change or you think these are good enough to weather the storm?
A: My feeling is that at least on the rupee side the bigger concern is related to FNCR-B repayments and there we believe Reserve Bank of India (RBI) has marshalled its resources quite well, it has prepared the market pretty well and we don\\'t see disruption coming in FX market and via FX market into rates market through FNCR-B deposit. Those redemptions will be met.
Second thing is that Indian 10 year yield percent on new securities is indicating that they have factored in RBI. Now clearly we will have to wait for RBI\\'s credit policy on October 4 as to how the new governor comes with his agenda. Certainly markets will form a particular view after hearing him. His action on announcing open market operation shows that the continuity path will happen. Right now Indian fixed income market is supported by liquidity from about minus Rs 90,000 crore in April 2016 we have moved to almost plus Rs 80,000 crore partly to meet FNCR-B redemption outflows but this open market operations continuity provides confidence with market that while there may be a little bit of uptick on the yield overall direction of policy rate as well as market yield will still continue to be on the softer side. The gap between Indian 10 year yield and the American 10 year yield also is potentially large and that also cushions on further softening of Indian interest rates over a period of time.
Prashant: So, essentially the short answer in a way is that you don't see any accidents there, even if expectations of a Fed hike strengthen, global volatility increases, you think the situation is pretty solid here?
A: The situation is far more comfortable in the currency market and the bond market than let us say compared to the equity markets.