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Last Updated : Aug 22, 2013 03:06 PM IST | Source: CNBC-TV18

India paying price for over-dependence on FII money: Dalton

Speaking to CNBC-TV18, UR Bhat, managing director, Dalton Capital Advisors says emerging markets (EMs) have been huge beneficiaries of the US Federal Reserve's Quantitative Easing (QE) seen for the last several quarters.

Foreign institutional investors (FIIs) haven’t yet offloaded a significant amount of capital from the India, however, the negative market situation could get worse if they do pullout large amounts of money says UR Bhat, managing director, Dalton Capital Advisors.

Speaking to CNBC-TV18, Bhat says emerging markets (EMs) have been huge beneficiaries of the Quantitative Easing (QE) seen in US for the last several quarters.

“If there is going to be a tapering off then certainly we got to pay the price. And that is the price that we are paying. It is not as if something has happened suddenly,” adds Bhat.

Also read: Fed's hawkish message a lever for rates

However, the optimistic side isn't lost on Bhat who says the government’s corrective actions can inspire confidence and boost FII inflows.

Below is the edited transcript of Bhat’s interview to CNBC-TV18.

Q: You have been witness to the carnage that we have seen in the markets but have you started to ride the eulogy of the emerging markets (EMs)?

A: Not really. I think EMs have been huge beneficiaries of the Quantitative Easing (QE) that we saw in US for last several quarters and if there is going to be a tapering off then certainly we got to pay the price. And that is the price that we are paying. It is not as if something has happened suddenly.

India has ofcourse contributed to the confusion itself through domestic measures that we should have been taking but we have not taken. Nevertheless, I think what we are seeing today is with probably less than about a percentage point of total Foreign Institutional Investor (FII) money that has come into this country till now, just a percentage has gone out.

Therefore, we have really not seen FII selling and if FII selling comes, I think there may be more pain. But it should be possible for the government to come out with policies that inspire confidence for foreign investors. If that does happen things should look much better.

Q: 5500 held for a long time and then it has given way. What kind of range do you see the Nifty moving in now?

A: The big doubt is about FIIs’ continued love for India. If they don't withdraw too much money, I think the market should stabilise around 5200 level. The big bet is whether outflows would happen or not. If outflows were not to happen and if business is as usual, then the market would probably stabiliSe around 5000-5200 levels. But if not, if there is further outflow which cannot be ruled out, I think we have to take all the bets off the table.

Q: You interact with many FIIs, honestly do you think they are staying in India because they like the story or are they not selling because they know what damage it will cause to their net asset values (NAVs) even if they sold a couple of billion dollars of stock down. Is there a sense of helplessness about them? They can see the story having gone sour but they are trapped without being able to sell in an illiquid market.

A: That could be the reason why there is not so much of selling coming through but the fact is that the rupee has depreciated almost 15 percent year-to-date so it has to stop somewhere.

The government is doing whatever it can, of course it could have done much better, no doubt. Nevertheless, whatever it could have done in the short-term they are trying to do. Maybe it is too many things, but at 65/USD if there is some stability in the rupee and if there is some appreciation also, atleast people will revisit the whole India story again and see whether at these levels it is worth holding on or it could cause further 10-15 percent damage by probably selling another USD 4-5 billion. That is the call FIIs are taking.


They are certainly trapped at these levels and whether it is worth selling at these levels is something that they are examining. So, that will depend on further action by the government and where the rupee stops.

Q: Are FIIs also booking out of some of these well owned sectors like IT and FMCG etc?

A: I think so, if the pressure on specific scrips is anything to go by, it looks as if some of those stocks which have be FII favourites have been hit badly. So, it means that atleast selectively FIIs are selling all those stocks that they have been holding for quite some time and which have done very well for them.

Q: What would you attribute to the kind of pressure that we are seeing in some of the names which were outperforming over the last few months, names like ITC, Reliance Industries, Bharti Airtel, why have they come under such a lot of pressure these last few days?

A: Most big investors are revisiting their exposures and these are the only stocks where probably they would have made some money. If they have to really pare down exposure to the Indian market, then these are the stocks that they could sell because if they sell other stocks they would probably incur losses.

Secondly, they could probably ensure that they incur more losses because they cannot sell whatever they have, the whole quantity at current dynamics. Therefore, the only place where they can pare down exposure in the Indian market is those which can be sold and those where they have made some money. That is why those stocks where there is huge FII holding is something that we need to be worried about.

Q: Do you think in this kind of a context where they cannot sell when the market is falling very hard, they could be using any upsides or any pullbacks to liquidate positions which will make for a fairly difficult market on the way up as in the market might just have a ceiling which is not very far from here in the near-term?

A: That is likely because today it is not so much about whether the Real Effective Exchange Rate (REER) of the rupee is at these levels or it is overshot. I think it is a question of crisis of confidence and crisis of credibility. Hence, if by whatever magic wand the government is able to establish that someone is at the wheel and someone is in control, then things can change.

But with the sort of confusion that we have been seeing over the last several days now, I think investors would continue to sell at every rise and therefore the upside is somewhat capped at not more than 5500 as of now.

Q: It is interesting to see the way the metal stocks are moving because some of them like Tata Steel are actually up to any percent this month and the Chinese data is also improving. Would you put any money here or is this just a dead cat bounce?

A: I think it is a dead cat bounce because finally we have to really look at the fundamentals. It could be that China is changing its stance as far as buoying up the economy is concerned. Therefore, there might be some technical bounce here and there but. There are all these problems about export bans and not having enough resources, raw material. It is not as if there will be a huge surge in demand for metals and metal prices would go up dramatically. It is a dead cat bounce, one could play that if one is a trader but for a long term investor I think there could be better prices to enter.

Q: For this issue to get solved, the market is really awaiting something like perhaps a good diesel price hike. How much in terms of a quantum as well as timing do you think is politically viable at this point?

A: What is politically viable is for the politicians to decide, but the point is that something needs to be done that is seen to be inspiring confidence. Whether it is diesel price hike or coming out with a policy of addressing the huge current account deficit over the next couple of years, these things need to be put in place.

There is no point in saying that they have got everything organised. It is not a secret. The government tells that it is going to ensure that the CAD would be coming to 2 percent in the next three years. These are the things that could inspire confidence instead of just saying, ‘I have something up which I am not going to tell you, so you believe me.’

I think the market has gone past that stage because the crisis of confidence, the crisis of credibility has reached a level where something drastic needs to be done.

Q: So you were talking about this 5200 breaking if FIIs sell. If we do see a selling rout in the market what could the range of this market move down to in your mind?

A: The next level technically that a lot of people are talking about is 4800 if selling continues to any significant degree. So, I am sure the government also is as concerned about the economy, about the market as we are. Therefore, we expect something to come. About 4800 is not something that we could speak of very lightly. I think the market would get some confidence from the government shortly and hopefully things will be much better.

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First Published on Aug 22, 2013 10:52 am
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