Cautious optimism ruling mkt; FIIs upbeat on equities: HSBC

The Indian markets have witnessed somewhat of a bull run towards the beginning of the year and foreign investor interest has been on the rise. Hitendra Dave, MD of HSBC India believes the mood can be best described as cautious optimism stemming from the positive news flowing from the government and policymakers.

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Dave also feels that close to the budget, most investors will tend to wait before committing further or deciding the other way round. He explained, "There is an underlying theme that a lot of the problems are internal, fixable and there is a lot of hope that some of the well-known solutions will get addressed either over the forthcoming weeks or in the budget itself."
The Reserve Bank of India eased repo rates as well as CRR in its January monetary policy and Dave considers this as somewhat of a surprise. According to him, inflation seems to have slowed down and there might be a possibility of another rate cut in the central bank’s next policy review on March 16. Here is the edited transcript of the interview on CNBC-TV18. Q: Could you provide the details with regards to the third annual India Investor Conference. What are the companies that you would be showcasing in the conference and what is the mood at this point in time?
A: This conference is a testament to the kind of change that we have seen in India over the last eight to ten months. We have more than 250 investors representing institutional money, both domestic and offshore. We have more than 60 institutional accounts which are here, from where these 250 investors are coming in and you can sense that a lot of them are in a far better frame of mind now than they were at this time last year when we had our last conference.
From that perspective, I can sense that and it is validated through the money flows that we are seeing over the last three-four months. I think from a corporate perspective, apart from the traditional large, listed companies in manufacturing, infrastructure and real estate and banks, we also have quite a few unlisted companies here which provide the investors that we have brought, both domestic and international, get a perspective from the listed as well as the unlisted companies.
We also have a few multinational and unlisted domestic names. Overall, the platform is there to get a full range of feedback about activity levels in sectors plus we have a very high quality parallel track where policymakers and authorities from fields ranging from consumer spending, land acquisition issues, direct cash transfer benefit schemes also participate. All those things is what we have put together for our clients today and tomorrow.
 
Q: What is the mood specifically with respect to Indian equities since I am sure your audience includes a lot of Foreign Institutional Investors (FIIs) as well? I am asking because after a blazing 2012, last week we were underperformers and we ended the week in negative while they ended positive.
A: The word that best summarizes it would be cautious optimism. I think they are a lot more optimistic, given what they hear from the policy makers and authorities. From the corporate side, they are still getting relatively cautious feedback as to the ground reality in terms of consumer demand, industrial demand, pricing power, cost of inputs etc. So this is the mix in which they are operating.
My own guess is that so close to the budget, most investors will tend to wait before committing further or deciding the other way round, if they choose to do so. At this juncture, I would take cautious optimism but, there is an underlying theme that a lot of the problems are internal, fixable and there is a lot of hope that some of the well-known solutions will get addressed either over the forthcoming weeks or in the budget itself.
_PAGEBREAK_ Q: You have a lot of presence from banks this time around, the likes of HDFC, HDFC Bank, Canara Bank which would possibly be talking in your conference this time. Can you just detail what exactly is the mood with regards to the banking space and has the valuation gap and the disparity that existed with regards to PSU banks vis-à-vis private banks narrowed according to investors?
A: When it comes to banks, you almost get a split feedback. Those banks which are much closer to the retail end or the consumer end tend to have a fairly positive outlook and a very rosy scenario. The fact that rate cuts have taken place and the fact that consumer strength continues to remain, you hear that story when you talk to that section of the financial intermediaries who is dealing with it.
On the other hand, those banks which have had issues related to infrastructure and other loans or known troubles, there is still a sense that possibly the worst is behind and that is what is detailed in some of the reports also. However, nobody is confident enough to say all the problems are behind and the future is only going to be brighter. It is a bit of a split situation that you get from the banking side. Q: What is your sense now on the way the Reserve Bank may behave and the ten year will behave at least for this quarter. We have some idea of what the finance minister is speaking in terms of the borrowing programme. We have to take that 4.8 percent of GDP as the fiscal deficit that will come. How would you see the ten year moving?
A: It is quite interesting that post the rate cut, which itself was a surprise to a part of the market because in the lead up to the policy, there was an indication that possibly the RBI was not exactly ready. So, to that extent it was bit of a surprise cut. You also had an element of cash reserve ratio (CRR), which most people had not provided for.
Despite that you have seen yields move up across the spectrum of instruments, whether it is bank certificate of deposits (CDs), which have moved up 50 to 60 basis points, whether it is government securities, which have moved up 7 to 10 basis points at the ten year level, everything has moved up. It would seem to suggest that the market is reading the tone of the RBI as the number of cuts or the total quantum of cuts is going to be a little lower.
So, on the one hand that is there. The other issue is much more technical, the CRR cut does defer the likelihood of open market operation (OMO) execution maybe to the last bit of February or the early part of March. It is a combination of market being heavy, CRR getting announced, RBI’s tone suggesting lesser rate cuts than some people had expected. I think in that sense yields have moved higher.
However, my sense is we are close to the top when it comes to the ten year yield for further short-term, you can have reactions taking place today because of reports that RBI is considering a reduction in the held to maturity (HTM) limited sector but, once that churn is through my sense is ten year yield is very close to its toppish levels and as the borrowing programme for this year draws to a conclusion over the next three weeks or so, I think between now and three weeks, you will have the top defined.
Thereafter, it should be next RBI policy, next borrowing size etc, which will come to play a role. Q: When do you think the Reserve Bank of India (RBI) will cut again, after all the governor said. He didn’t say there was no room for cuts. So does he cut on March 16 or wherever it is or does he cut on May 3 or neither?
A: My own guess is the governor himself will determine closure. At this juncture, based on whatever we are seeing of pricing power across a range of industries, I think inflation will tend to be surprising a little bit on the softer side. I am setting aside the effect of the wholesale increase in diesel prices etc.
I guess the inflation data will be a little on the lower side than what the projection leads upto 6.8 percent for March. I think you asked the question at the media conference as to how does one determine the current account, which is the new variable which has been suddenly made as important as inflation and growth.
I think that I don't think any of us will have a clue about it and the RBI will have a sense of it. At this juncture, my own guess is inflation heading lower, growth certainly not surprising on the upside. I think March cut is very much in play even now. Q: What are investor expectations from the budget? What do they expect on February 28 and what’s the mood like going into this budget?
A: The number one thing is that at this juncture almost everyone has now come to accept that the fiscal deficit for the financial year 2013-2014, in all probability will be somewhere between 4.7 percent and 4.8 percent because there has been an indication that it might be lower than 4.8 percent. That’s why I am saying it will be between 4.7 percent and 4.8 percent.
So that’s the number one thing, which is going to be am issue. It would have been a great positive six months back. I think it has been broadly recognised that this is how it will be. Hence, I don’t think there is an incremental surprise there.
The other thing is what are the big issues which are confronting our economy? The prominent one from a fiscal side is this drop in the savings rate and the question remains as to whether the budget will provide anything to incentivise savings and especially into the financial savings, either through bank deposits, mutual funds, insurance, the National Pension Scheme or whatever.
My own sense is that clearly it is very much on the table this year. I would be very surprised if the budget does not provide for an increase in either the 80CC limit or a new section which provides an upfront incentive for savers to channelise money into funds, insurance or National Pension Scheme or any other scheme of that nature.
I think clearly the budget will try and address the unhealthy drop in savings rate that we are experiencing, especially in the household sector in the financial market. I am not sure whether the budget itself will address other issues in terms of structural reforms of land acquisition or quicker clearances or environmental policies and stuff like that.
But, from a financial market perspective, I think these two would be the prominent ones – that is tax breaks on savers, fiscal deficit and the third important element which I hope somewhere will be considered by the authorities also relates to the aggregate size of borrowings next year.
I think there are a lot of people who believe that interest rates at the long end are determined less and less by the policy rates and more and more by the sheer dynamics of bond supply and demand. We know for the last two-three years the RBI has stepped into address this gap.
Coincidentally, there has been tight liquidity. Therefore, there was a reason for it, but if you didn’t have tight liquidity then you would have serious issues in terms of supply overwhelming the potential demand.
So, I think the other side would be with a 4.8 percent or 4.75 percent fiscal deficit the assumptions are of a nominal rate of growth of gross domestic product (GDP) and therefore, what does that translate in terms of the government borrowing programme since a back of the envelope calculation seems to suggest that supply exceeds demand on an assumptive basis by about Rs 100,000 crore next year also.