Feb 26, 2013, 03.40 PM IST | Source: CNBC-TV18

Primary mkt to get FII flows; see lukewarm Budget: BofA ML

After a good run, Indian indices have pulled back a bit in the last few weeks, which indicates that the expectations going into the Budget are not very high, says Jyotivardhan Jaipuria, head of research, BofA Merrill Lynch.

After a good run, Indian indices have pulled back a bit in the last few weeks, which indicates that the expectations going into the Budget are not very high, says Jyotivardhan Jaipuria, head of research, BofA Merrill Lynch.

"The Finance Minister (FM) has already an indication that the fiscal deficit will be 5.3 percent for this year and 4.8 percent for next year. So, there will not be too much of a surprise or disappointment from the Budget per se," he tells CNBC-TV18.

Apart from the Budget, another key positive trigger for the market would be rate cut by the Reserve Bank of India in both March and May policies. "The recovery in earnings and GDP seems to be far away. People are buying India on the hope that things will turn because the rates are getting cut and reforms are happening," he explains.

One can expect the market to rise higher in the next few months based on hopes that earnings growth will improve and policy action will translate into GDP growth. However, during the fag end of the year, elections would take focus off the market and till that time if none of these expectations are met then returns will be subdued, he adds.

According to Jaipuria, last year, a large part of foreign funds came into the secondary market, but this year primary market will absorb large part of it.

Below is the verbatim transcript of his interview to CNBC-TV18

Q: How do you access the pre-Budget buildup in the market this time around?

A: We had a good run in the market and since then we have had a bit of pullback over the last few weeks. So, in some sense it is good that expectations, going into the Budget are not very high.

The FM in some sense has been very transparent. The key thing in the Budget that people always look forward to is the fiscal deficit ease in some sense. He already had indicated that it will be 5.3 percent for this year and 4.8 percent for next year.

So, in that sense, there will not be too much of a surprise or disappointment from the Budget per se.

Q: Through December and January Foreign Institutional Investors (FIIs) actually tanked up quite a bit on this market. If there is any disappointment from the Budget do you expect that to see a sharp market reaction?

A: Yes, it is not as much the Budget, but it is that India last year was one of the best performing markets. So, this year if you see people were well-positioned on India. People over the last quarter, last year had actually increased their weightage on India.

So, to that extent people did take a bit of profit from India over the last couple of weeks. I think Budget is probably one issue, but the other one is also the Reserve Bank of India (RBI) policy. So, if we get a rate cut in March and then another one in the next policy in May, then that will probably turn out to be positive for the market.

However, it is like the numbers which are coming in today of Gross domestic product (GDP), of earnings, they are not great. The recovery in earnings and GDP seems to be far away. So, people are actually buying the hope that things will turn because the rates are getting cut, because reforms are happening.

Q: It is earnings actually that has left a bitter taste in the mouth. Is it almost single digit performance this time around?

A: Yes, this quarter would be like a very poor quarter in terms of earnings. We started the quarter with our expectation that it will grow at 3-4 percent. That actually turned out to be even worse because earnings have been flat. So, the earnings growth for December quarter was zero.

My view is that FY14 will be better than FY13 partly because the base effects will catch up. In FY13 some of the global commodity stocks did very badly and they dragged down the aggregate earnings. So, FY14 will be a little better mostly because these global commodity stocks won't show that same steep decline in earnings, which they did in FY13.

Overall, it will be a year where, probably FY13 we should end the year at 5 percent earnings growth. I think FY14 will be more like 10 percent. The problem today is consensus, bottom up number for FY14 is around 16 percent. So, I think there is more downside to go, more downgrades to go from where the consensus is sitting at today.

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