Motilal Oswal AMC sees muted flows ahead of earnings

The market has been hit recently by speculation over the GAAR and its implications on foreign inflows. “We still have the Budget to be passed and get some further fine print on that. So till that point in time we will see muted flows if anything we will probably see negative flows,” Rakesh told CNBC-TV18.

Below is an edited transcript of Nitin Rakesh’s interview on CNBC-TV18. Also watch the attached videos.

Q: What is your sense is the backdrop favouring some kind of strength in the market or do you think the market will grind in a lowish kind of range for some more weeks?

A: We are likely to stay in this drift pattern and anytime would drift with lower volume. It’s more likely than not to have a downward bias, so the clear trigger now for the market continues to be what happens next week with the RBI policy and how the earning season starts to shape up.

Over the last four weeks, we have gone from the markets looking for an excuse to rally, as we saw in January, to a point where now the market need a reason to rally in and at this point in time the two triggers of the RBI policy combined with the earning season should be the next trigger.

Q: The big concern is on flows and a lot of people believe the real impact of GAAR or whether tax needs to be withheld will show up in this series. What are you hearing about money?

A: There has been a kneejerk reaction and anytime there is uncertainty, the clear thing is to not do anything and that’s what we have seen in the volumes as well in the last two-three weeks. So for the very short-term there seems to be certain hesitancy amongst the foreign investors and the guys who are little more worried are the guys who are much more longer-term in nature, not so much the trading fraternity.

So till we get little more clarity, till we get answers to what this substantially GAAR actually means for Mauritius investments, can people look at Singapore as a viable alternative and eventually they will have to get resigned to the fact that there might be withholding tax for short-term gains.

That hasn’t fully sunk in and yet people are still going through evaluations and opinions. We still have the Budget to be passed and get some further fine print on that. So till that point in time we will see muted flows if anything we will probably see negative flows.

Q: What do you expect the impact of the RBI policy to be on the stock market? If the RBI comes in with a 25 basis points cut but indicates a hawkish tone because of many risks it sees to deficit, oil prices etc and the market gets the sense that while it may have cut once it will not cut a whole lot during the course of the year, do you still see a sustainable rally because there has been a cut in place at least?

A: I think at this point it’s hard to see how the RBI can start a sustainable interest rate cutting cycle because they have a short window between now and September, where inflation may seem soft because of base effect but there is a fair amount of muted inflation suppressed in the system. So 25 to 50 bps is likely between now and September and then one should expect a pause for further things to improve. So the market will be disappointed if it expects a sustained interest rate cut cycle.

I would be very surprised if RBI comes out and gives a tone that indicates anything contrary to the fact that they are starting the interest rate cuts. They will have to be very careful and cautious because this is not going to be a one-way street where once they start the cut, they will have to sustain it. I think there are other tools that they are going to use to ease monetary policy, which they have started doing. which is CRR. They may do something on the SLR front as well to keep liquidity surplus or at least sufficient. It’s going to be hard for the markets to get that kind of an environment, so it will have to be something completely unexpected, if that happens.