Jul 01, 2013, 04.01 PM | Source: CNBC-TV18

Hang on! liquidity will chase India in H2: Kotak AMC

Kotak AMC's Alroy Lobo expects Indian market to show an improving trend going forward. He believes liquidity will return to India owing to its strong market fundamentals

Alroy Lobo

Chief Strategist & Global Head Equities Asset Management

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Alroy Lobo, Kotak AMC expects liquidity to return to Indian market. He believes liquidity chases markets with strong economic fundamentals and India is one of the few countries that will show an improving trend going forward.

"In the second half, you would see that (liquidity) being reflected also in the stock prices," he says in an interview to CNBC-TV18.

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Meanwhile, he believes a large amount of rupee depreciation has already been done. With the decline in gold imports, the current account will benefit and that will be positive for the rupee, he says.

Lobo expects Reserve Bank to cut policy rates by 50 bps. "More liquidity measures are now required either in the form of cash reserve ratio (CRR) cut, or in the form of very active open market operations (OMO) operations," he adds.

When talking sector specific, Lobo remains bullish on telecom and cement stocks and is underweight on infrastructure and capital goods space.

Below is the verbatim transcript of Alroy Lobo's interview on CNBC-TV18

Q: What has happened with liquidity and do you fear that there is more coming in terms of redemption or a pullout? Has some of the immediate friction been stemmed with last week?

A: As far as liquidity is concerned, if you look at India over the last 18 months we have benefitted from allocations from emerging market (EM) funds, from global funds. We haven't really seen too much of India dedicated active money coming into the country. Whenever there is pressure on liquidity because of what is happening in the US, in terms of tapering the QE, it will make some impact on global liquidity.

Liquidity always chases markets where there are economic fundamentals and from India’s stand point it is one of the few countries that will show an improving trend going forward. Therefore, I would expect liquidity to return to the Indian market. In the second half, you would see that being reflected also in the stock prices.

Q: What has been the nature of the outflows? We use the term exchange traded fund (ETF) outflows but is it where most of the money has flowed out? What have the long only done through the month of June because it has been terrible in terms of returns for someone who is investing from overseas?

A: It has been a case of global volatility across markets. You have seen impact on the bond markets as well as on the equity markets. Even the commodity prices seem to be pretty weak and so, it has affected all the asset classes. This is bound to happen whenever you have a change in the stance particularly for large country like the US in terms of their view on quantitative easing (QE) going forward.

It would be disruptive in the near term but longer term it would be pretty positive for countries which have economic fundamentals. I also see global allocation shift gradually away from bonds into equities and that is going to favour India also.

Q: For the rupee, the downside risk that many economists are talking about now is that the rupee tests the RBI patience and the RBI may be forced to lift rates as well going ahead. How do you see the depreciation in the rupee impact the monetary policy now?

A: A large amount of the rupee depreciation seems to be done. In fact one of the biggest positive surprises for the market would actually be the Balance of Payment (BoP) or the current account on many fronts. For example, gold has been one of the biggest components of imports and with the ban on gold imports we expect that component to actually start falling.

Secondly, commodity prices are weak and that will benefit our current account. Also when the rupee depreciates, exports become very competitive from India stand point and discretionary imports actually start getting curtailed. That becomes some kind of self correcting mechanism which helps correct the current account deficit. On the portfolio side as far as capital account is concerned, equity portfolios are likely to be strong.

We still expect the central bank to cut policy rates by about 50 bps. More liquidity measures are now required either in the form of CRR cut, or in the form of very active OMOs. For that matter, very significant government spending, because that would help to transmit the reduced policy rates into lending rates. So, we expect portfolio flows to respond to this liquidity measures that the RBI would perhaps implement and that would also reflect in the lending rates and help to see the economy recovering.

As far as foreign direct investment (FDI) is concerned, it is also showing lot of positive trends. We have seen a lot of multinational companies looking at India with interest like Hindustan Unilever.

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