With the Budget session expected to resume shortly, the biggest worry from a market point of view is whether there would be any big bill, which results in a big increase in fiscal deficit, says S Naren, chief investment officer (equities), ICICI Prudential Asset Management Company.
However, he feels, as long as there are no steps, which are taken to hurt the fiscal deficit, the market will actually interpret it positively. Interest rate coming down now is more or less a likelihood given the way the inflation, crude and gold is falling, he says.
"There is a lot of work that needs to be done to make it easy for businesses start projects and expend projects and other similar things," he says.
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Here is the edited transcript of the interview with CNBC-TV18
Q: There is a big breather that has come in the form of the macro situation, like the slippage we have seen in inflation and the impending improvement in the current account deficit (CAD) because of the slump in commodities. How much of a relief would that give the market and how do you think it will get factored in, in the times to come?
A: I think it will. If you think about it, a year back crude was higher and diesel prices were lower at that time, so if you account for the differential, if you take all the crude and product prices as it prevailed a year back till date you would even have a lower inflation number than what was reported.
So, on the whole it is very positive from a point of view and so we are setting the stage for good drop in interest rates over a period of time and that would be extremely positive, but that’s the first part of it.
The second part of it is that we have to see growth come back and for that, interest rates are only one aspect of it. There are many more things that are required and for that, there is a lot of work that needs to be done to make it easy for businesses to put up projects, expand projects and those kind of things.
I think that would be the second phase that would be required. Interest rate coming down now is more or less a likelihood given the way the inflation, crude and gold is falling.
The combination of the three makes it much easier to believe in interest rate falls. But we need the second step also, which is not as easy as it looks, but it has to be implemented over the course of the next six months to one year.
Q: We have a lot of earnings which have been floating in as well. What was your take on the disappointment from Infosys? What would your expectations be from Reliance this evening?
A: I believe that the earnings season cannot be great. When you have current account deficit, fiscal deficit, inflation and growth falling, which was the situation in the January to March quarter, to expect corporate earnings to be great was not in our scheme things. We in fact believe that the corporate earnings cannot be very good in many of the operating sectors of the economy.
So I don’t think we are really worried about earnings. In fact, today, we are no longer worried about inflation so I think the only thing we need is for this growth factor to actually come back. Growth will go up not because of very good monsoon alone but because of other factors. Earnings will always be lagged at this point of time.
When I talk of earnings, I am talking of sectors in the economy like auto or capital goods or those sectors where I believe earnings will be lagged, and it is not going to be an indicator of the market. Growth will be an indicator of the market rather than earnings.
Q: The only problem at this juncture is that hopes are very high as we get into the Reserve Bank policy. That lays a foundation for a big disappointment if the market does not get what it wants. There is one section of the economist fraternity who believes that the structural problems of food inflation cannot be addressed in form of a rate cut and perhaps the RBI, needs to take into cognizance the higher Consumer Price Index (CPI) number as well and be a little more calibrated in its approach. Would you be worried about the risk of a disappointment from the Reserve Bank policy or are you also going with the 25 bps repo rate cut this time?
A: The structural part of it is only one thing that the increased Minimum Support Price (MSP) is much higher than 10 percent each year. Other than MSP, if you look at it, I do not think inflation is a serious problem even on the food side and clearly of course, monsoon will play a role in food inflation. If you see the way the stocks have got built up in the cereals part, today the food stocks that we are carrying is at all-time record.
Why is this happening? If for example, MSPs had not gone up so significantly, it is possible that the cereal inflation could be lower than what it is. So, today, at this point of time people think that the food inflation is structural. My belief is if you believe that MSPs are structural, increases are structural, and food inflation would be structural. If MSP increase is not structural, then food inflation may also come down.
In any case, today if you look at it, ex-food and energy inflation is headed for a fairly substantial fall, and my colleagues on the debt side tell me that the Reserve Bank does use the core inflation number, which is clearly on its way down. It is very evident if you see the number of industries where discounts are being offered, we did an analysis and found out that today in most sectors you have huge unutilised capacity and this is an output gap theory which Professor Taylor used, and on that basis today inflation is no longer a problem in India.
Q: The finance ministry sources indicate that the ministry itself may consider deferring the tax residency certificate issue and it might do so by two years – that’s an option it is looking at. How market moving do you think it could be if it comes through?
A: Any step, which reduces procedures for investors and for entrepreneurs, would be interpreted positively by the market. So, clearly, it would be interpreted as a positive.
Q: The Budget session is expected to resume on April 22 or maybe a couple of days from now. What would your expectations be in terms of the key bills that you would like to see some progress on?
A: Obviously, the biggest worry from a market point of view is whether there would be any big bill which results in a big increase in fiscal deficit. I think that is the only worry from the market point of view. The market is priced for let’s say, cutting edge reform bills which can be passed possibly in this session. So I think we are in a situation where the government has done a brilliant job in bringing down fiscal deficit, which in turn has brought down current account deficit and inflation. So as long as there are no steps which are taken to hurt the fiscal deficit, the market will actually interpret it positively.