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India story is not as compelling as was the case probably a few years ago. FII flows are likely to taper off concidering weak macro outlook of India, says UR Bhat of Dalton Capital Advisors.
India may have been the biggest growth story in the beginning of last decade after foreign institutional investors flocked Indian markets. However high current account deficit, sharp decline in Indian rupee, contraction of GDP from 9 percent to 5 percent, policy paralysis and many such factors have taken tall on India’s shining image.
"India story is not as compelling as was the case probably a few years ago. The risk of stance that is currently on in the developed markets has led to that dramatic outperformance of the developed markets versus emerging markets," observed UR Bhat of Dalton Capital Advisors.
Ben Bernanke's recent comments that US may taper off the quantitative easing by year end would also restrict this easy money from flowing to emerging market.
He expects FII inflows to taper going forward as developed markets like US and Europe are likely to bounce back. Given the unprecedented fall in rupee, now Reserve Bank of India is also unlikely to extend any further rate cuts.
"It does not look like as if they (RBI) is in a great mood to cut interest rates anymore and since the last statement the rupee has collapsed. Therefore, there is absolutely no case for forfeiting interest rates anymore," Bhat stressed.
Below is the verbatim transcript of his outlook on the markets:
All of us expected in the early 90s foreign institutional investors (FIIs) have come to dominate the market. They are the ones who give direction to the market and therefore in a manner of speaking we have become as a nation hostage to those inflows, the market has become hostage to those inflows. As you all know, high trade in current account imbalances have been one of the causes of the foreign institutional investors taking a slightly dim view about how things are panning out here. Of course the precipitous decline in the rupee is something that will make everybody nervous including foreign investors because if you see year-to-date (YTD), foreign investors even after this billion dollar that has gone out over the last couple of weeks have brought in about USD 14 billion in this country and this USD 14 billion has produced a dollar return of something like minus 12-13 percent, which means that we increasingly require more and more foreign institutional investors money for the market to even stay where it is.
So I think declining rupee is one thing that can shake the confidence of big investors and that is probably taking a toll today. The cause of the plunging rupee we have come to a situation where all of us were expecting in fact at least the government was expecting that Reserve Bank of India (RBI) will keep cutting interest rates. With the state of the rupee today, I do not think that looks like a distinct possibility. Therefore there might be further danger for foreign debt investments in India to leave the shores even further because as I said, only just about under 10 percent of money has gone out and these are the consequences.
Therefore, if there is no prospect of further softening of interest rates in India. So we should brace ourselves for that. Everyone knows what is the reason for foreign investors or in fact any investor to take a rather dim view of Indian equities. On the macro side, it is tepid economic growth. As you know, we have come to about 5 percent from the 9 percent that we were having just a few years ago and an array of stalled projects, halting reforms, dysfunctional politics as everyone knows (the parliament is hardly functional) and waning consumer confidence. All these factors are affecting sentiment quite dramatically. While investment was halting for quite some time in this country, but now even consumer confidence is faltering.
As you see, even two-wheeler numbers or auto numbers or in fact white goods numbers are falling. Against the background of all this finally earnings growth of corporate India is also sort of moderating. Therefore, the outlook for market is juxtaposed on all these considerations.
Therefore given the fact that capital inflows from outside the country have been giving direction to the market for quite some time. Let us see what is the outlook there. One is the US economy appears to be on a mend. If you see the data coming out of the US whether it is housing stocks, whether it is unemployment figures, things have started looking up and that is what has given Ben Bernanke the confidence of saying that maybe we will taper off the quantitative easing 1,2 and 3.
Therefore, there is a chance that the people may start thinking in terms of pulling out money. Quite a lot of that money has leaked into emerging markets including India. So all this money that we have got, almost about USD 14 billion from January 2012, a significant amount of that has been on account of QE and this could reverse. Even Ben Bernanke has put lots of caveats on that saying that if everything goes according to plan then maybe he will start tapering at the end of this year and probably withdraw all QE and come back to normalcy sometime in the middle of 2014. That is juxtaposing quite a lot of developments which should be true to the liking of the economists in the US.
Europe continues to fester as we are discussing now - hardly any bond sells are happening, most sovereign bonds are not getting subscribed. Therefore things are pretty bad. We were talking about just six months ago like for example a bank blow-up, sovereign bankruptcy, breakdown of the European union, I think these things are not being talked about anymore. Therefore, while Europe seems to be still festering, it is not as if something dramatic could come out of Europe. As a matter of fact therefore what we are seeing is that things look a bit better in international markets. If you see the US Dow probably is up about 15-16 percent YTD and we are down by about 12-13 percent today, therefore someone who has invested in India a foreign investor invested in India in January 2013 has had an opportunity loss of almost 13 percent that is continuing in India, it lost about 12-13 percent but if he had gone to the US, he would have probably made another 15 percent. Therefore, the opportunity loss is as high as 28-30 percent.
In Japan, there is a huge amount of quantitative easing happening. Therefore even though there might be some tapering off in the US, in Japan things should continue to be sort of soft as far as the monetary easing is concerned. We have also seen that China itself, which was of course the big bull as far as the global economy is concerned that also, has seen signs of slowdown.
As I said, a possible end to the rate softening cycle of India, which is possible because if you see the Reserve Bank of India (RBI) sort of policy statements, it does not look like as if they are in a great mood to cut interest rates anymore and since the last statement the rupee has collapsed. Therefore, there is absolutely no case for forfeiting interest rates anymore. If there is no softening of interest rates, there are no great capital gains that can be made in the fixed income market. So there is a case for foreign investors to probably further take back money from the fixed income market, which could have even further effect on the rupee and also on equity markets by implication because this contagion could spread. If rupee cracks further then it is just a matter of time before corporates also starts bleeding and therefore this contagion could spread even to the equities market. Of course, the absence of hard decisions that all of us want the government to take remains a possibility.
So as sum and substance is that India story is not as compelling as was the case probably a few years ago. The risk of stance that is currently on in the developed markets has led to that dramatic outperformance of the developed markets versus emerging markets, which India being a part of that. There could be more pain on account of that. I am sure, all of you are tired of listening to further pain, we already had huge bout of pain as it is. Therefore, I think we should look at something better than having further pain.
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