There is no case for de-rating of India: HSBC AMC

In an interview to CNBC-TV18, Tushar Pradhan, CIO of HSBC AMC says, currently the black picture around India is painted only with the macro, the disappointment in the big bang reform expectations as well as what the government has been able to achieve so far. “I think if those get corrected at some point of time, India should be in the good books again,” he adds.

There is no case for de-rating of India, says Pradhan.  “There is a concept called return on equity (ROE). If you look at each of the other comparative markets, the ROE for Indian companies has sustainably remained much higher than any of the other markets. I think for that reason alone, which is intuitive, you should deserve a premium,” he asserts.

Going forward, he says, with the way the commodity prices are, with the interest rate scenario domestically, hopefully which might come off a little bit towards the end of the year, the RoE picture doesn’t seem to be changing dramatically. “We may not improve ROE but I don’t think we are going to lose that position. So from a de-rating perspective, I don’t think that is a case to be made for,” he adds.

Also read: Don't think there is a case for downgrading India, says BoAML

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: What is your sense on the market now? It has been a bit of a grind the last few weeks, will it continue this way?

A: The general sentiment seems to be a little cloudy from a foreigners’ perspective. They being a very large part of our markets, I think that is how it is going to be for a while. The foreigners are a little suspicious in terms of how to take the India story forward. There are various reasons - the change in regulations, the barrage of negative news which has been hit.

The entire positivity around the India story, which began in January, is taking a little bit of a breather. Though once clarity emerges, I think they will reassess. I don’t think India as a story is over. It is just that the interim negativity will cause people to just pause a little bit.

Q: Big headwind for the market has also been what has been happening in the currency market. How have you read that? What is happening in the currency market you reckon?

A: I am not a currency expert. But it is a combination of factors. One is that there is inherent weakness in the current account deficit. There are significant chances to kind of wonder about how worse can it get. I think it could possibly get worse. So, that is actually influencing the currency traders.

The other thing is that the overall sentiment towards India as an investment destination also plays a part in how the currency works because that is an anticipation of inflows. If that picture also changes to flat to negative, there is an impact on the currency totally. So, I don’t think there is any one single reason to say why the currency is weak. But I think if you look at the fundamentals, the fundamentals just point out to you that you have a weakening fiscal situation, you have pretty significantly large current account deficit. That just simply tells you that your currency needs to be weak.

Q: We have not seen too much by way of flows in the April series at all. What is your sense of what the global outcome will be through May? Do you think risk-on can come back and we will get our proportion of money or should we live with lowered expectations of money flows because expectations got elevated after the big inflow in January and February?

A: In the first two months of this year, we suddenly saw risk-on. That was not only for India though we did see the benefit of it, it was across the board. So, you had significant inflows in Korea, Taiwan, and Japan. Across the board, if you look at last few weeks, the money has started to kind of dwindle, to start to not come in. Not that there is any outflow yet. So, there are no significant outflows from the total number for any of these markets, maybe except for Taiwan where it has seen outflows so far.

But in India, above the USD 9 billion mark is where we have hovered. I think it would be very optimistic to think that these kind of inflows will continue into the month of May for significant reasons. One, the clarification regarding the general anti-avoidance rule (GAAR) is expected in mid-May. People will take their own calls in terms of how their outlook remains on India from the middle of the year onwards. So, I think we are definitely in for a breather.

I think only if there is significant confidence building up back into the Indian markets towards the middle of the year, will we see flows back strongly towards the end of the year. But I think for now we should more or less accept the fact that people are going to wait and watch.