Worst of outflows yet to come; macros to get uglier: HDFC

Dipen Sheth of HDFC Securities is bearish on the market and sees no reason for long only funds to be interested in India. Speaking to CNBC-TV18, he said on the ground nothing much has changed as far as macros are concerned. He feels Indian equity market needs new set of triggers or structural reforms to attract investors.

He expects the market to be more 'irrational', and said though Nifty may not fall below 5,200 or 5,000, but the current level is not sustainable either. Sheth extended his negativity to the macros too. "The market is in denial of the fact that a lot of purchases, imports on depreciated rupee are now going to enter the Indian economic system and a lot of this is going to translate into higher inflation as we move forward. “The numbers were ugly and I can only see them getting uglier from here," he adds.

Additonally, Sheth believes that the Indian equity market hasn't yet seen the worst of capital outflows. Also read: Investors valuing India positively; EMs attractive: EPFR Below is the edited transcript of the interview to CNBC-TV18. Q: This market has by and large been quite steady and the up move has been held up until this 5850 level. What do you think is the next trend that we will see in the markets if all goes as planned with these two events? A: We would obviously look for some fresh triggers to emerge from the events of the coming few days. We have seen a very sharp pullback and the fundamental school of thought would say that nothing has changed fundamentally in the economy and this is just a technical bounce back. The measures taken by Raghuram as Reserve Bank of India (RBI) governor have only reinforced the bigger trend which was the fear of the Federal Reserve (Fed) tapering was receding. I don't think much has changed on the ground but markets are markets, that is the nature of the beast. So, now a fresh set of triggers would be needed and unless fresh structural reforms or fresh new direction and way forward for the economy is indicated, I don’t think there is much to be interested in at this point of time for the long only. Q: So you would worry even that the bottom around 5200 that we put in recently is also in danger of being breached? A: It is difficult to say whether a certain level like 5200 or 5000 will be breached, that is for the technical guys to verify. But if you ask me is this level of the market sustainable? I would say no. Does that mean markets cannot go up? Of course they can go up because it is a function of money coming in. If there is more reassurance on currency protection or defence, then some more money would come in and it would pull in some more Exchange Traded Fund (ETF) allocations and so on. So, yes, market can remain a little more irrational for longer than we might think but am I optimistic about markets at this point of time, certainly not. Q: How did you read the inflation numbers, it looked terribly ugly to me but how does that alter or evolve your view on what the RBI will do on rates from September 20 all the way till March? A: The numbers were ugly and I can only see them getting uglier from here. I hate to be a party spoiler and say scary or boring things at this point of time. But the fact is that a lot of purchases imports on depreciated rupee are now going to enter the Indian economic system and a lot of this is going to translate into higher inflation as we move forward. I also feel that the disconnect between consumer price index (CPI) and Wholesale Price Index (WPI) is something that will be at the back of the RBI governor’s mind. So we should look at CPI at this point of time, we should look at the high and soaring vegetable prices despite a very good monsoon. We should look at high imported inflation creeping in from the backdoor even as we talk about a better inflation trajectory. I think we are in some sort of denial on this issue. There is no way that rates can decrease from here and I do not think that the investment cycle is being held back by higher rates, as much as it is being held back by a lack of policy response.