Re stability key for FII flows in near-term: StanChart Sec

Rahul Singh, Head of Equity Research, Standard Chartered Securities tells CNBC-TV18 that the government is gearing up to move on reforms, especially in areas where consensus isn’t required.

India Inc is looking for clarity from the government on a number of issues - ranging from revival of the economy, FDI in multi-brand retail and civil aviation, further reduction in repo rate by 100 basis points and cash reserve ratio.

The monetary tightening measures used by the Reserve Bank of India (RBI) to control inflation hardened interest rates and investments were impacted in a very big way. Singh expects some pickup in policy soon. The RBI has clearly showed it has moved on from inflation-control mode to promoting growth.

The government is preparing to bite the bullet, with partial decontrol of diesel prices after With the Presidential elections taking place on July 19, many market analysts including Singh feel that fuel price reforms are inevitable and a decision could be taken any time after the election of the new President.

On the Indian market, Singh sees a slowdown in discretionary spend, and remains underweight consumers. He remains bullish on HCL Tech from the IT space. His preference also tilts towards roads and ports, gas utility players like Petronet LNG and GAIL among others.

Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more.

Q: We have been talking about the policy piece and you have authored some reports on what may or may not come through. The market has built in some expectations. What do you think can be delivered over the next few weeks?

A: What we came up with a framework is dividing all the policy issues which include some of the regulatory issues on two parameters - one is the extent of political will required and the other one is the timeframe in which we are looking at a resolution to some of these. Obviously, the clear policy issues where we see immediate rectification and where the political will required is low is where we have focused our attention on.

Some of that has already played out in the last two weeks since we authored that report. One was the CCI rulings on cement. We think the same thing could happen in tyres that after the ruling the stocks go up. We think the spectrum policy is going to be announced soon so we see some relief or respite in telecom once that is out of the way in the next two-three months.

Similarly, we have seen some activity on the gas utilities, which is something which we had highlighted that we think the fears on the collateral damage on the IGL ruling of PNGRB on some of these stocks like GAIL and Petronet LNG was way too overdone and those stocks have reacted positively once those fears have kind of died down. Now we move into what I call the second quadrant which is where we think the government needs to do something quickly but the political will required is high.

There are two-three things which I think are very important one is diesel price hike and the second one is FDI in retail/aviation and if the near-term, if the last few days sound bytes are to go by, something is going to be on the anvil. That will be very critical because those are the segments which we had qualified as in the second quadrant, which means the policy issues where political will required is high but something might happen in the near-term.

If they move from the second quadrant to third quadrant which means the government musters of the political will to undertake some of those measures; those could be market moving policy measures because till now whatever has happened has been more at the stock level. These two things I think would be important for the government to get the sentiment up in a big way.

Q: You track the oil & gas space. Any thoughts on Essar Oil specifically and the kind of pressures it is holding on this all tax payment issue?

A: We don’t cover Essar Oil so at this point of time I wouldn’t like to comment too much on it. Obviously there are issues which are there in the public domain in terms of the sales tax issue so till the time that is resolved we don’t see the stock doing much either way. From a funding point of view, they need to resolve that. We don’t cover it so we don’t have a firm view on the stock at current levels.

Q: The big one is the diesel price hike. What is your own assessment of whether the government can do it and even if it does it whether it can make it stick because of opposition from other parties because I think that probably is the big policy event that the market is looking at much more than even FDI in any of those sectors?

A: That is exactly right. That is the sense I get talking to investors as well. This is probably the single biggest policy event if you can call it and it is an event for India to give a signal out to the market that it has probably bottomed out in terms of the policy. It is important for the government to capitalise on the fact that petrol prices were hiked significantly not too long ago and since then it has come off.

So the government has a chance of convincing its partners as well as the population that once we shift to the market based mechanism, things could even come down and not only go up all the time. There is an opportunity now that crude prices are down. They could do a small hike and would now be at least seen as in a positive way. Couple it with the fact that petrol prices have come down since the last hike.

So there is an opportunity but whether they are able to capitalise on it immediately after the presidential election remains to be seen. I would agree that it is probably the single biggest event in terms of providing the market, not on the index levels but on the policy, it will be a significant inflection point.