Like to see Indian mkts cool off a little: Morgan Stanley

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Q: We have a Union Budget as well in few weeks. Do you expect anything significant to come out by way of policy and do you watch that in terms of a cue for the market?

A: I think it would be very positive for India if we were to see some structural changes on the policy front. From our perspective, we would like to see India accelerate its privatisiation programme and that would be a good signal to global markets and attract ongoing liquidity flows to India.

 

We feel that improvement of tax-collection regime in India could only mean positive from a long-term perspective and improving the fiscal position of the country, but I think that as things stand, at some point in time fiscal deficits of the size that India has been running year-in and year-out are going to come home and hurt the economy and the markets.

 

Q: Do you see the risk withdrawal of liquidity from any of these markets because we saw bit of that happening in the crude market, which worried a lot of investors in the emerging markets in this region. Do you see the possibility of anything like that happening?

A: I think you have to recognise that fast money investors, the hedge fund investors etc, are far more prominent in our markets today than they have been for years. So from that perspective you could see withdrawal of liquidity.

 

But when we look at it from an Asian perspective, looking pan-Asia again we think that earnings growth will be reasonably solid, valuations have come up but it's still okay and then there are these liquidity conditions that are quite positive.

 

So we think these combinations should mean that Asian markets are okay. India by contrast we think will be more challenged on the liquidity front and doesn't have the valuations safety that some other markets in Asia have. So if we were to see liquidity from a foreign investor perspective change at the margin, then India would be vulnerable to that in our view.

 

Q: What is your current rating on India and if it were indeed equal or underweight, what would it take for you to review that position?

A: We have been underweight for sometime, and for us to change our minds we would like to see the RBI raise rates. We would like to see the market come down on the back of that and for things to look a lot more sustainable in India from the medium term. The longer-term growth potential of the economy is very positive. So we would just like to see things cool off a little.