Tushar Pradhan, CIO, HSBC AMC believes that global fund flows are the main reason for the rally in Indian market and expects India to be on investors’ radar if global fund flows continue.
The current D-Street rally is aided by global liquidity injection by counties like Japan and US; but one cannot be sure if this rally will sustain as the fundamentals of Indian market don't indicate anything dramatically better than before, believes Tushar Pradhan, CIO, HSBC AMC.
India will continue to be on global investors' radar if global fund inflows continue. A significant rally by the end of this year is possible if foreign investors continue to park funds in the market and domestic factors favour the indices, he told CNBC-TV18.
On the macro front, given that inflation seems to be coming down to the Reserve Bank of India's comfortable level, one can be hopeful of a sharp drop in rates.
Pradhan maintains his overweight stance on oil marketing companies. He feels recent fall in crude prices has made oil stocks attractive and investors should consider them.
On the flip side, he finds FMCG stocks expensive now and is not so upbeat on the sector. He further added that decision on US Immigration Bill will haunt the IT sector and things may not turn out to be a very positive for this sector.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: What have you made of this big rally over the last few weeks? Do you think it is sustainable?
A: Internationally, there has been a huge infusion in liquidity beginning from Japan sometime ago and then eventually the bond buying exercise in the US as well as other parts of Europe. Obviously, as liquidity builds up in the system, risk on is something which is a likely outcome. All regional markets, not only India, but all equities across the board have seen that impact.
So, India being a recipient of very large chunk of that liquidity is really the cause for the rally. Because, if we look at the fundamentals, there isn’t anything yet to indicate that there is anything dramatically better than what we were looking for maybe three months ago.
So, on the whole, I would call it a global phenomenon - global liquidity wave which has risen and that has helped India do what it has.
Q: Has it changed expectations any, for what the second half of the year could yield for the market or are you approaching it as just that - a trading rally right now that could retract, if liquidity does as well?
A: I won’t go far as much as saying that but the second half is going to be a very interesting one for India because the Indian elections are due, probably by the middle of next year and that is the time that the government will then have to not do any of the reforms that it has planned to do because then they will go into some sort of shut period, which is prior to the election.
By that time, obviously there will be a lot of other factors at play and all of the political parties will get fairly active at that time. The markets will then bear the brunt of whatever is being revealed at that time.
So, the second half is a real difficult one to call. My belief is that the Indian economy will start to improve at some point of time. However if it coincides with this sort of uncertainty, the market may not really take any direction.
However at the same time, globally if the flows continue, liquidity continues, then India will continue to remain very much in the radar for most international investors.
If everything goes right, towards the end of the year we should see a significant rally. But if there are any other external events or even internal, domestic to India, like elections that calls people to pause about what may likely happen very early next year or middle of next year. They might want to hedge their bets a little bit. So, it is very difficult to call the second half this year.
Q: The last leg of the rally has been led by the rate sensitives. What are your expectations of what kind of rate cuts might eventually come through because expectations have really gone up over the last few days?
A: That’s true and part of the reason is whatever the RBI has been speaking in the past about the comfort zone that seems to have actually come about on the inflation front. So, there is now a renewed expectation that interest rates may come down dramatically because that seem to be the only hold out for the RBI because obviously growth was slowing down and all the other indications pointed to the fact that you needed a lower interest regime to kind of revive growth.
Inflation was the only fly in the ointment as much. But with the inflation now down to where it was, it appears that that road block is over. So we could expect some sharp drop in rates.
Having said that there are few things that we need to keep in mind; one is that the number that we saw is likely to be revised. The other factor is that the major cause for the very steep drop has been due to one component, which is food. Food prices have really driven the inflation index down. We expect that, that is not a real sustainable way to look at inflation in the future. However, core inflation on the WPI also has come down. So there is some confidence there.
However, the RBI having been circumspect all this time is not going to rush in to kind of reduce rates very dramatically. I think they will continue to take a gradual approach.
So, interest rate is definitely on the way down - that is something that we predicted at the beginning of the year. We have seen three rate cuts so far. I think the gradual drop in interest rates will continue well through the year.
READ MORE ON D-Street, global liquidity injection, Tushar Pradhan, HSBC AMC, domestic factors , Reserve Bank of India, FMCG stocks, US Immigration Bill , WPI, inflation index down, Food prices, core inflation, interest rate, commodity prices, oil and gas, technology, FMCG, US Immigration Bill
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