Rate hike to keep market off balance? Nirmal Jain answers

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Rate hike to keep market off balance? Nirmal Jain answers

"It's difficult to say that worst is over. We hope that the central bank refrains from hiking rates further in the next October meet," Nirmal Jain, Chairman of India Infoline told CNBC-TV18.

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Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets ITC BSE | NSE 29/05/12 Are Mutual Funds betting on ITC? Other Stocks in this news Nestle India | Cadila Healthcare | HCL Technologies |

A sharper-than-expected hike of 50 basis points each by the Reserve Bank of India (RBI) in its key lending rate spooked the market today. Rate sensitive counters like auto, banking and realty bore the brunt of heavy selling. "It's difficult to say that worst is over. We hope that the central bank refrains from hiking rates further in the next October meet," Nirmal Jain, Chairman of India Infoline told CNBC-TV18.

He believes that the recent policy tightening by the apex bank will affect the capex cycle and medium-term growth of India Inc.

According to Jain, this rate hike is a positive because if the RBI favoured growth rather than inflation, then, market would have continued to rise but the gains would get capped after a certain point. The equities would have found it difficult to breakout of the consolidation range, thus hurting earnings. "The market scenario looks healthy with 12-18 months horizon," he further states.

Below is the verbatim transcript of his interview with Sonia Shenoy and Gautam Broker. Also watch the accompanying video.

Q: This 50 basis point hike must have caught you by surprise, but wanted to ask you about one aspect that FIIs brought out. There were some foreign brokerages pointing out that perhaps this is a good thing for the economy and for the markets because this tamed the inflation demon, a situation is taken very strongly by the RBI and perhaps the worst is over now in terms of the rate tightening - do you feel that way as well?

A: It is difficult to say that the worst is over, but we hope so. We hope that the monsoon will be good. And in the next credit policy, i.e., in October RBI will at least not increase the rate if not start the southward moment again. At this point in time, this is an optimistic move for the market because the reality of the situation today is that rate hike has been much aggressive than what people were prepared for.

This definitely impacts the capex cycle which has already been slow. This will impact growth more so in FY13 and not as much as in this year. So this will have a medium-term impact. There is always a compromise or a trade between growth and inflation. RBI has taken one extreme view that it is trying to tame inflation. Within inflation too, RBI has cited wage hike as one of the reasons. Wage hike is again function of optimism and expectation about the business environment and typically in a country where normally government ministers takes a task which the salary should not be brought down. So it will be difficult to imagine.

Many of the inflation components they don't respond to monetary policies as directly as one would expect. Therefore, the impact of monetary policy on inflation is very limited. On the other hand, impact on growth rate is quite direct and certain.

Q: As you correctly pointed out this is clearly a risk to growth. How much do you think has been priced into the market? Or do you think what the RBI does today and containing inflationary expectations will mean that earnings estimate will be revised downwards even from here?

A: Markets immediate reaction to this will not matter as much for long-term investors. There are two ways to look at this situation: one, suppose that there was a growth orientation of monetary as well as fiscal policy and the market continues to rise. On one hand, market might react negatively today, that is, one part of it but the rise will be capped now.

Second, market will really find it difficult to move up or breakout of the consolidation range that has been for sometime. This will have a lagged impact on corporate earnings. Therefore, when you look at the market scenario for next say 12-18 months, this is a pure theory as well as practice that interest rate hike will definitely bring down the expectations on the market movement. So I think today's movement is just one small part of it but the appreciation or the expectation that you could have for 12-18 months will also now be brought down.

The GDP growth estimates our research has brought it down to 7.7% even before the policy. The GDP growth will be more in the range of 7% and if there is some bit of lack of luck on say crude oil or monsoon then it can get into the range of 6% also. This is the time when we will see the impact on the earnings in market much more.

Now it remains to be seen that how next two quarters monetary policy takes shape, but currently we are seeing that the private sector capex is decelerating because the projects at these kind of interest rates will not be viable. Public sector capex also for variety of reasons which are government internal as well as interest rate is not taking off and in a growth economy like India, capital formation is very important to sustain the GDP growth rate.