The Reserve Bank of India is unlikely to cut rates in its December 2 monetary policy despite October retail inflation cooling off to an all-time low of 5.52 percent, reiterates Sonal Varma, India Economist, Nomura Financial Advisory & Securities.
According to her, the 6 percent inflation target set by the central bank for the rate cut is intermediary and as market enters 2015, the entire framework of the monetary policy will change.
However, easing inflation and a pick-up in demand is opening up room for rate cut, she adds.On fiscal deficit, Varma believes the spending is in-line with government estimates though the revenue lacks behind.
“An additional round of expenditure cut will become necessary if the government does not meet its target of 4.1 percent for the current fiscal,” she adds.
However, the situation will be much better next year due to the recovery in oil subsidy and pick-up in growth.She believes the foreign direct investment flows will increase with government focussed on ease of doing business. On the other hand, ratings upgrade will be seen only when the agencies are convinced of growth, she adds. Speaking to CNBC-TV18 on the Q2 earnings hits and misses, Prabhat Awasthi, head - Equities and MD, Nomura, says there were slightly more misses than hits with numbers not indicating a pick-up in demand just yet.
Awasthi believes financials will be the leaders of the next leg of the rally with public sector banks outperforming for the next six-eight months. He believes financial companies will be best play for next two-three years if growth, inflation remain favourable.
According to him, financial sector valuations are reasonable but one needs to be stock-specific while investing in PSBs.
He picks State Bank of India as his top pick among the pack. Among other sector bets, Nomura is overweight on capital goods, infrastructure, Entertainment and Oil PSU companies.
Adding to the discussion, Neeraj Gambhir, MD and co-head, Fixed Income India, Nomura, says good bond market rally over next 12-18 months will benefit banks, helping in recapitalisation of the banking system.
He also expects the 10-year bond yield move sub-8 percent level once the market is convinced of rate cut.On rupee’s continuous fall since last four trading sessions, Gambhir says RBI’s intervention to control the fluctuation in the currency has been aggressive.
The central bank does not wish meaningful appreciation in the Indian currency and has therefore been actively intervening by purchasing dollars, he adds.Meanwhile, Awasthi concludes saying resolution on Land Acquisition Bill should come this winter session, starting November 24.
He believes government is close to resolving most issues on goods and services tax (GST) and must take the discussion in the Parliament in winter session.Interview transcript on next page. _PAGEBREAK_Below is verbatim transcript of the discussion
Q: What is your sense with the inflation data coming in and increasing pressure not just from India Inc but even from the government. You think the governor might just relent since he has a penchant for surprising the market as well?
Varma: Not in the December 2 policy meeting. The RBI’s credibility itself is at stake and 6 percent really was the intermediary target, the ultimate target is around 4 percent or it could be a bit higher. So, the entire frame work of monetary policy will undergo a change as we get into 2015.
You are getting a more rule-based monetary policy framework with a medium-term target of inflation staying in a band. We are seeing part of the moderation in inflation because of government measures. But part of it is also because growth has slowed down.
Now we are at a stage where growth is starting to bottom-out and you will start to see growth picking up into next year. So what impact that has on the inflation outlook in 2016-2017 because we are moving towards a medium-term frame work will be important. That is a consideration RBI has to take into account while taking the interest rate decision. With inflation coming down there is some room opening up but the question really is how much room is there.
Q: What did you make of the second quarter earnings, were there more misses than hits for you and when exactly do the earnings start clearly tilting in favour of hits?
Awasthi: This quarter when we were looking at the data it is almost equal, there is slightly more misses but it’s even, actually not very far from each other so it is 50-50. But the overall numbers themselves don’t tell you a story of pickup at this point of time.
Growth in sales is close to 5 percent which is the lowest in last four quarters. To be expected primarily because the rupee impacts have worn off, infact rupee impact is negative, commodity prices are weaker and there is a large impact of commodity prices on top lines.
On a sequential basis we are still at least if you look at the earnings, they are not telling you yet a story of pickup. But these are historical numbers.
You could actually start seeing some acceleration in earnings in another six months or so. Before that there are patched where pickup has happened for example autos we have seen better data but the core sectors still are generally weak.
Once the governments actual efforts start paying off which might take another five-six months, you probably will see a better picture.
Q: You have come out with an August 2015 Sensex target of 30,300. What do you think are the leaders of the next leg of this rally?
Awasthi: Actually what has not done well that is to be there because we have seen fantastic performance by the defensives in India. Consumers and pharmaceuticals have been the standout performers over a period of three-four years. Obviously, one year consumers lagged a bit.
The most important and the biggest sector in India is financials and as macro improves, as growth improves that sector has to be the leader. Valuations there are still comfortable so they are still trading at discounts.
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