Aug 06, 2013, 02.02 PM | Source: CNBC-TV18

Even modest FII pullout will topple shaky mkt: Sanger

The only positive factor for the Indian economy has been the good monsoons. But even increased rural demand won’t be sufficient to carry the entire economy and hence a 5 percent GDP growth looks rather optimistic

The RBI's liquidity tightening measures impacted cost of funds for banks and it cannot walk away from increased interest rate now despite the fact that the rupee did not strengthen, says Arvind Sanger of Geosphere Capital Management. He says the economy will feel the pain of the increased rates and the only sectors that are holding the markets right now are the consumer sector, IT and pharma.

Also Read: High rates choking investments; need about 9% growth: CII

The only positive factor for the Indian economy has been the good monsoons. But even increased rural demand won’t be sufficient to carry the entire economy and hence a 5 percent GDP growth looks rather optimistic, Sanger told CNBC-TV18.

He feels that the markets are on such shaky grounds that even a modest selling by FIIs in the safe haven sectors could cause a pretty sharp downward correction.

Another issue according to him is the strengthening US economy. As long as the US data is good, emerging markets will continue to underperform, he says. Besides good US data also means Fed will be on course to tapering its bond buying programme.

Below is the verbatim transcript of Arvind Sanger’s interview on CNBC-TV18

Q: The Indian data points have been quite awful as you would have noted. Do you think this market will manage to hold out here or could it be looking at sub-5500 levels this time around?

A: As you were saying a little earlier there is nothing magical about 5600 where it should hold. I guess a few weeks back I was among the optimistic, saying that the range would hold and the bias over time could be on the upside, but I think with this Reserve Bank of India (RBI) needing to defend the rupee and I assume they needed to, India is really in a box right now. The rupee has not strengthened.

The RBI cannot afford to walk away from its increased interest rate that they have put on the short end without collapsing the rupee, so they are stuck with that which means that the economy is going to feel the pain for the fret of higher rates flowing through both to corporates and to consumers and I would say if there are two or three sectors that are holding up this market, one of those is the consumer sector, the others obviously are IT and pharma.

IT and pharma are largely foreign facing, but the consumer sector is very much domestic facing and based on the new service data, we already have manufacturing data that is very weak, now the service data is showing significant weakness and you may have said this earlier in the programme, monsoons are not one magic wand that is going to fix everything.

How much rural demand can carry on its back the rest of the Indian economy, not much and therefore I think that at this point 5 percent is looking like an optimistic growth target for the next fiscal year or the current fiscal year and therefore the next down leg in the market could come if some of these consumer stocks that are trading at astonishingly high multiples were to correct to what would make more sense, then that is your downside in the market of getting the next leg down.

Q: Up until now we have not seen any kind of large scale pull out by Foreign Institutional Investors (FIIs) from the Indian market. Do you fear that the next leg of this market will see a big pull out by FIIs, especially in some of these sectors that are holding up that is some of the defensives?

A: The reality is I think the market is so fragile, you do not need to see a big pull out, you need to see even a modest pull out, cash withdrawal by emerging market (EM) investors and if they start selling some of the market leaders in the consumer space or in anything else, if people are hiding they are hiding in consumer and they are hiding in IT and pharma and of those three the consumer sector is the most vulnerable and if it saw some selling I am not sure there are any significant domestic investors looking to buy into these sectors.

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