RBI act to induce sanity; relief rally in banks: BlackRidge

With the Reserve Bank upping its game and selling dollars, playing the currency swap market and also buying bonds, it is expected to induce some amount of sanity into the markets, believes Arindam Ghosh, MD & CEO, BlackRidge Capital Advisors.

Also Read: RBI issues fresh measures to bail out banks, mkts to rally
But how long it will last is a big question, especially with the US Federal Reserve expected to start QE tapering in September. Ghosh says in the run up to the tapering, markets are going to be rather volatile. Countries, such as India, with large CAD may have to bear the maximum brunt of it, considering easy money flow will tighten. But post the tapering, and once there is certainty in the market, markets may be expected to incrementally adjust to new normals.
He asks investors to wait and watch and be a little cautious. He tells them to see how the policy measures pan out.
On banks, he says fundamentally there has been no great improvement, but the entire sector is at levels where it may see some short-term relief rally. The economy is still in turmoil, fiscal deficit continues to remain high, current account deficit continues to threaten and the banking sector is reeling under non-performing loans (NPL), so unless these issues are brought under control, any relief will be short term, he adds. Below is the verbatim transcript of Arindam Ghosh's interview on CNBC-TV18 Q: How have you read the Reserve Bank of India's (RBI) communication overnight, what could it do to markets you feel?
A: There is something to cheer about on the basis of what RBI has done. Typically, RBI was in the past following a classic textbook approach of raising interest rates, bringing down growth, sucking away liquidity and then trying to manage the currency. I think the Indian version of the Operation Twist, what we have seen is expected to get some sanity in the market. Q: How would you approach the banking space now?
A: The banking space is something where as I said there is going to be a lot of cheer so we could see some relief rally coming in the short-term but one needs to bear in mind that one has to look at fundamentals. Fundamentally I do not think there has been any great improvement. The economy is still in turmoil, we have a situation where fiscal deficit is high, the current account deficit continues to threaten and the banking sector is reeling under non-performing loans (NPL). So, it is more sentimental than fundamental.
So, probably in the short-term we would see some kind of money rotating and coming back into the banking space but it could well be short-lived unless fundamentally the economy improves and the currency situation improves. Q: How do you read the global situation because last few days we have not seen very strong foreign institutional investors (FIIs) numbers, going into September do you think that will be the case that for the next few months, we will have to do without any significant inflows?
A: All eyes are now on Jackson Hole and whilst expectations of what exactly is going to come out is not clear, at the same time there would be some kind of inevitability around the fact that the tapering is going to start from September. In the run up to that of course markets will continue to remain extremely volatile.
What is expected to happen is that in an environment where the epicenter of crisis is now firmly over Asia and in particularly over countries with large current account deficits and where currencies are virtually on a free fall, they may have to bear the brunt of the onslaught in a situation where liquidity kind of tightens and the easy money flow starts tapering off. It could well be that volatility is going to increase a lot.
Having said that, once this gets out of the way and there is certainty in the market, a lot of these markets would heave a sigh of relief and from thereon, we may expect the markets to incrementally start adjusting to the new normal.
_PAGEBREAK_ Q: In the last couple of days we have seen some of the defensive spaces start to come under pressure, the likes of IT, pharmaceuticals. Do you expect more selling pressure and perhaps a pullout of these names?
A: The Indian market today with the kind of capitulation we have seen across stocks, there seems to be fair amount of value which is surfacing. The issue is whether one would jump into the ring right now or one would like to wait.
There are two things, which we need to keep in mind. One is external and second is internal situation that we have in hand. External as I mentioned, I think in a situation where there could be some serious reversal of flows, would create a lot of pressure on the currency as well as on the current account deficit. Domestically we will have to see how policymakers are able to handle the situation and are able to restore and reinstall confidence.
So, in a situation which is as volatile as this, it could well be that from where we are - three months back we had predicted that the market is due for a healthy correction of around 10-15 percent which is what the case has been. Now whether this is where we feel that it is going to bottom out is difficult to say because the way we have all these variables and many of them are pretty fast moving and dynamic, anyone of them snapping could see the market starting to look very ugly.
So, it is a wait and watch. I think one can take the argument that there is lot of value buying opportunity but at what price. So, our view would be that one should wait and watch, be a little cautious, see how the way our policy measures that have been taken, unfold. I would say that yesterday’s announcement is a step in the right direction. I think these are extraordinary times and extraordinary times warrant extraordinary actions. So, we will have to see how they play out and then take a considered view but there is no harm preparing the laundry list. Q: One part of the market has seen some capitulation, which is financials, the industrials before that but do you fear that by the time this market bottoms out, you probably see capitulation in some of the more expensive sectors, the one which have kept the overall average multiples floating at the 13-14 level by being valued between 20 and 40 times?
A: Absolutely. We would definitely see some fair amount of correction. Whether we can classify that as capitulation or it will go to that extent, it will be hard to say. It all depends on how well the market adjusts to the new normal and how quickly the market adjusts. So it could well be that there could be a 5-10 percent kind of a correction but not the kind of mayhem that we have seen in the broader market.
Having said that those pockets are definitely extremely expensive, not sustainable and therefore correction is long overdue. As we were talking of banking and probably that could well be now something which would find favour, these kind of rotation would keep happening, which probably would make it a little more broadbased. That is what is key. The market is extremely narrow. The first step towards stability is to try and see how we can make these fear pockets increase and have more interest coming and getting built up a lot of these factors as well. Q: Eventually are any of these policy measures enough to create a resumption of the bullish trend that we have seen or do you think that these are just stopgap measures that may see periodic movements that will eventually get sold in the market?
A: It cannot just be one measure which will ignite markets and restore confidence. It has to be a series of measures and one will have to look at how each one of these individually and collectively play out. There is no quick fix to the kind of situation that we are in. There are serious issues at hand. It is indeed a grave situation. There are a lot of theoretical discussions, which are happening whether we are back to 1991.
We don’t think there can be any comparison between 1991 and the current situation. There are some resemblances which we get to see between now and what happened in 1997 when many of these Asian countries had large current account deficits (CAD), which happened either because of higher investment or lower savings. Currency was on a free fall and we have seen sharp reversal of flows.
So to that extent, some of the boxes if one has to compare gets checked but today's situation is a lot different. Policymakers are far more vigilant, they have more tools in their hand. So a combination of these definitely will help us to salvage and recover from the current situation. That is the first step. We need to restore investor confidence.
Today you have these international tabloids, which are screaming about the currency crisis that is happening in India particularly because of CAD. So a lot of negative sentiment is also adding up and those also simultaneously will need to get addressed. One must understand that there is nothing that is expected right now from the economy and the state of the markets. So that is a clear opportunity. So if some of the immediate threats that we have and the large threats that we have in terms of currency, in terms of CAD can be managed, we could well see investor confidence starting to build up.
Now, when that is going to happen, it is not a switch, it is going to gradually happen. Clearly, once we see the tapering of the quantitative easing (QE) starting to happen from September of this year and probably ending in 2015, we will see a lot of assets or money moving into US equities.