Will stay put in banks despite RBI's move: Peter Elston

In the past few days RBI has been taking various steps to curb rupee fall. On Tuesday it lowered the overall limit for borrowing under the daily liquidity adjustment facility (LAF) for each bank at 0.5 percent of deposits.

Peter Elston, Head of Asia Pacific Strategy & Asset Allocation, Aberdeen Asset Management Asia Limited told CNBC-TV18 that he will stick to his investment in Indian banks and is not taking any notice of what the RBI has been saying. He says the fund house is focused on a small number of Indian banks and does not invest in the state-owned banks. His advice is to invest in selected banking stocks on a long-term basis as he sees Indian economy growing. Elston also said that he will prefer to stay invested in consumer stocks in long-term. Also read: RBI's moves not a surprise; rule out CRR cut: JP Morgan Below is the verbatim transcript of his interview to CNBC-TV18 Q: How are you approaching your investments in Indian banks particularly now in the light of the kind of tightening move that have come through from the Reserve Bank of India (RBI) over the last 10 days? A: That is an interesting place to start certainly. Frankly speaking, our holdings in Indian banks are very focused on a very small number of banks. We do not invest in the state-owned banks. So, we are very focused within this sector. Secondly, they are very long-term holdings meaning that we are aware that you have this interest rate cycle, you have this bad debt cycle that of course all banks are subject to. However, we certainly do not think that it is really worth playing those cycles from an investment perspective. The way we think one should invest in banks is to identify the good banks meaning the ones that have a very good process in assessing credit quality, whether or not they are going to get paid back by the people and companies they lend to and essentially stick to what they are meant to be good at i.e. deposit taking and lending and not getting involved in other areas. Once you have identified those banks just simply stick with them for the long-term. In the case of India of course you have an economy that is going to be growing for many decades to come and that is going to help the banks, particularly our banks to grow strongly. I am just coming to the answer to your question which is that we are not really taking any notice of what the RBI has been saying at all. Q: There has been some improvement on the other sector that you have held for a long time which is the IT faces. Are you looking to increase exposure or are you more heartened by what you saw in the results? A: I always feel like a bit of a broken record. Like our views on the banking sector, our views on the IT sector are also very long-term and they have not changed. Our long-term views are based on the companies that we own possessing very strong and sustainable competitive advantages that are not going to go away. If anything they have only increased as a result of the rupee weakness that we have seen over the last year. So, I suppose on balance we have been heartened by some of the results recently, but we do not tend to get too heads up in the short-term noise. Q: How are you approaching the consumer names in India? They have done remarkably well, but lot of questions are cropping up on whether such valuations are sustainable. Did you own some of these names to begin with and have you taken any profits because of this huge expansion in valuations? A: We have owned some of these names for a long time and we are aware that they are trading on 30-40, sometimes even 50 times prospective earnings. Therefore, the upside in the short-term might be a little bit limited. However, if you look at these companies in the context of where you think earnings will be or should be in 10, 15 or 20 years time on the basis that India's Gross Domestic Product (GDP) per capita is probably going to rise from approaching USD 2,000. If India's GDP per capita is going to be USD 10,000-15,000 in a couple of decades' time that means that the earnings of these companies is going to be 5-10 times higher. On that basis perhaps the fair multiple for these companies is not 30-40-50 times, but 80-90-100 times. I do not think that there is any chance that they will go to those sorts of multiples in the short-term, but I think as a long-term investor looking at things in that way can give you the comfort to not be too worried about current valuations and to just be happy to stick with them. Q: As long-term India investors though have you all been concerned about the kind of rout there has been on the Indian currency. From 2007 to now it is already down almost 30 percent. Are you worried that there could be significant chipping off on the kind of returns you get on this market because of the currency situation? A: One has to ask a number of questions in response to the fall in the rupee. A) Was it related to India specific issues or was it related more broadly to emerging markets (EM)? B) What sort of state are the country's finances in? The answer to the first question is that a lot of the fall in the rupee is not India related issue, but it is related more broadly to EMs. Therefore, it is more related to a sort of broadening caution with respect to EMs, but also an increasing confidence in developed markets (DM). It may not be something to worry about as much as would be the case if it was only the rupee that was falling. Looking at India's finances, do we have a sort of foreign currency crisis, foreign reserve crisis similar to the one that we had in the early 90s which preceded the structural reforms that were introduced by the current Prime Minister who was then Finance Minister and the answer to that is no. The finances are in pretty decent steps. Yes, we would like them to be stronger, we would like reserves to be a bit higher, but they are already pretty high. We would like Budget deficits to be a bit lower, but Budget deficits are probably more a feature of EMs and their growing pains. So, to put this into context or to conclude I would say that a lot of these currency movements are really the result of or going to be attributed to just general growing pains that EMs tend to experience. If you worry about exchange rate volatility or any sort of volatility in EMs then you will never invest in them. So I think one has to accept these sorts of things.