Excise tax cuts control inflation in short-term: JP Morgan

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS MF NAVs end on weak note as markets close in deep red Expect corporate tax rate cut of 10% in Budget: UBS Inflation, valuations are a concern: Merrill Lynch Markets to react to newsflow 2 deals to impact sentiment: Rajesh Jain ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty? Other Stocks in this news Infosys | Tata Consultancy Services |

The RBI has marked up the Cash Reserve Ratio (CRR) by 50 basis points to 6% and impound for free about Rs 14,000 crore of bank funds. The hike in CRR, effective in two phases, will kick in on February 17. The second phase starts on March 3.

 

In accordance with this, Adrian Mowat, Chief Asian and Emerging Equity Strategist at JP Morgan says that CRR hike has the potential to significantly dent equity markets.

 

According to him, the risk involved in such a stance is that the RBI is likely to end the growth party in India.

 

He says that the RBI move might result in lower PE for the market. That being the case, he says that this is not yet the peak for markets overall, but certain sectors will have to struggle; PSU banks, real estate and autos will see a fall.

 

In such a scenario, he recommends buying HDFC , Infosys and TCS .

 

 

Excerpts from CNBC-TV18's exclusive interview with Adrian Mowat:

 

Q: How are you reading these inflation figures and what the Central Bank is trying to do? Do you think it will significantly dent equity markets?

A: I think it has the potential to significantly dent equity markets. When one looks at Indian equity markets there are three levels of macro risk; you have got a high P/E, a relatively overvalued rupee and interest rates that have stayed relatively low considering the level of economic growth, and we associate these things with growth.

 

The P/E multiples are high because growth is strong, the rupee has been firm because strong growth has attracted capital and that capital has helped keep interest rates low. Now we are seeing the market pushing up interest rates and if one looks at three-month commercial paper rates, you have gone from around 7 to 9.5, so the market is already tightening. Now we have got the RBI coming in with further tightening measures, which are going to push up market rates both of the deposit and the lending rates.

 

So the risk is that RBI is about to end the growth party and if growth begins to slow down then you are likely to see a lower P/E, a low rupee and a potentially higher interest rates and so we are concerned about this.

 

It makes me reflect back to September '94 when the Indian market was doing very well back then, there was a lot of capital spending going on however inflation was picking up and the Narsimha Rao Government was concerned about that ahead of an election and they raised interest rates and that marked the top of the market for a number of years. But I don't think we are in such a dramatic situation at the moment but certain sectors may struggle over the next 12 months.

 

Q: How much collateral damage are you expecting then for the equity markets and for those interest rate sensitive sectors?

A: I think the chances are that the markets will under perform the emerging markets for the balance of first half of this year and people are going to be anxious about the thematic sectors whether that be construction building material, to some extent public sector banks, which we think will see some problems as interest rates have moved higher.

 

We would be recommending clients to focus on big blue chips. Be quite cautious about smaller midcaps; they tend to be the areas that suffer the most when interest rates are rising.

 

So our advice is to buy stocks like HDFC, which on the margin should get market share gains as interest rates go up and the banks less likely to completing in the home loan market. Also look at the IT companies, the IT companies will benefit if this event causes a weaker rupee, they tend to be very cash rich and so are less concerned about rising interest rates and so its again blue chips, it is out there buying a TCS, Infosys, is what you should be doing in the current environment.

 

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