Rupee may regain 60/$ in 6 months; buy IT on dips: Dron Cap

The Reserve Bank of India will not announce any more monetary policy measures now believes Pathik Gandotra, partner, Dron Capital Advisors. In an interview to CNBC-TV18, Gandotra says the market will realise that these measures are not working and hence, any further monetary moves are unlikely.

Also read: RBI issues fresh measures to bail out banks, mkt to rally
Gandotra says India, at this given time, cannot afford to have a tight monetary policy. "The issue is that the growth is so bad that you cannot spook it further because that becomes counterproductive. The moment you spook growth, equity flows also start going out and then you have a bigger problem at hand," he adds.
However, on a more optimistic note, he expects money to start flowing into the market once the fundamentals start improving and expects the Indian currency to strengthen back to 60 against the US dollar in six months time-frame. Below is the edited transcript of Gandotra’s interview to CNBC-TV18.

Q: Before talking about the global cues and the impact on our market, particularly on the Reserve Bank of India’s measures how do you see the market move and how short-lived do you think the impact could be?
A: The financials were heavily oversold and people believed that the RBI will do anything possible and use monetary policy measures, any kind of monetary policy measures to stem the fall of the rupee. I think now there is a realisation at the government and the RBI that those measures are not working.
Hence, we are attacking the wrong end of the spectrum. The market will now realise that RBI is not going to use any further monetary measures to stem the fall of the rupee because they will not work. I think that is what is going to happen in financials.
We will see a pullback in financials because of that and henceforth, when the rupee depreciates, there will not be that much of a scare in the minds of investors about RBI putting in fresh measures for financials, because they will tackle it from different angles. It could be through capital flows or through something else because India as a country cannot afford a tight monetary policy right now. The issue is that the growth is so bad that you cannot spook it further because that becomes counterproductive. The moment you spook growth, equity flows also start going out and then you have a bigger problem at hand. Q: What credibility can you assign to any action from either the RBI or the government right now because policies changing every three weeks, they try something and doesn’t work out then they try something else. What is the guarantee that the last bit of the action is how their mind is going to behave over the next six months or one year?
A: One cannot say with certainty but it sounds logical because if somebody tries something and it does not work, the one obviously changes course. It is just not possible that they will keep on going and repeating the same mistake again.
If one looks at the rupee, if it actually appreciates after RBI easing liquidity, then they will understand that investors are looking for more fundamental changes in India's economy and not just a carry trade between the US dollar interest rates and the rupee interest rates and that kind of a trade. So, once it does more fundamental moves, the money will come back. Q: If you are convinced that perhaps the RBI may not attack the banking space or the financials any further, do you think this is a good time to be putting money into some of these extremely attractive banks and if yes, which pocket would you look at?
A: If one looks at it from the bottom, they have already run up by 20 percent from the bottom that they hit yesterday. So, one might see some kind of consolidation because this view is not completely clear. It is still forming. Hence, there will be a process of bottoming out of these financials.
I would still buy private banks which are reasonably good franchises, which will also have a story of gaining market share eventually. Public sector undertaking (PSU) banks are strapped for capital as well, they might react more in the short-term because they are even more deeply oversold but the way to go is to look at private banks.

Q: What do you expect to see in bond yields? Now 8.3 thereabouts, what do you think is the near-term range?

A: I think it will go between 8-8.5 percent. That is where the yield will be. The issue is that one should also recognize the fact that the RBI Governor is changing; there will be a new thinking that will emerge in RBI. So, it is not as if the actions are going to be all over the place. There is a new thinking which will emerge in RBI, which will have a different way of tackling monetary policy and forex. So, that is what investors will look at whether that new thinking is making decisions which are more benign towards monetary policy.

 

Q: What do you think that new thinking will be? That new thinking will be to focus on growth and to not worry about the rupee?

A: When they worried about the rupee, the short-term rates went up to 12-12.5 percent, the long bond also went up 9.25 percent because people started believing that now the next step is of the RBI hiking cash reserve ratio (CRR) and the repo rate. That was the belief. Once that belief gets shattered again, the bond yields come back.

Hence, there will not be panic reaction on monetary policy. There will be volatility, which they have curbed. They have said it clearly that they want short-term rates at 10.25. They had gone to 12.25. So, there is some bit of excess there.


The issue is market force, market reactions are so violent nowadays that it becomes difficult to make policy, we should grant something to them as well.

Q: Where does that leave the rupee? Today we are talking about growth and bond yields, what about the rupee which till last week was the central piece that the government and the RBI were trying to address?

A: The point is in the short-term. Who knows there can be a problem as early as tomorrow if the Fed minutes are not taken positively by the market. However, the point is, in the medium-term the rupee has to come back because the logic is that with such a steep depreciation on the rupee one is going to see exports rebounding eventually and with exports rebounding, the trade balance will automatically correct.

 

The government put curbs on imports. We are expecting the fruits of the measures to come in the next five-six months but the full impact on the measures that they have taken and once all the measures come to fore, we might realize that it is not as bad as it looks like. So, I do not see rupee going to 55/USD, but I think 60/USD and odd is a decent range for the rupee. That is where it was actually looking undervalued. It is just that now there is some panic in the rupee and overshot its valuations. So, rupee will come back to near about 60/USD over the next six months.

 

Q: How do you approach the non banking financial companies (NBFC) space, which also came in for some severe punishment over the last few weeks?

A: That will depend upon the kind of business they are in. Companies which are focused on the industrial segment and servicing indirectly linked to the economy; there one might still see some time before recovery happens. But stuff which is servicing the consumer demand like housing, HDFC etc should rebound very sharply. The point is that it is company dependent; I cannot make a generic statement.
Q: What do you do with some of these expensive outperforming classes now like IT and fast moving consumer goods (FMCG); do you think they will give up some ground?

A: They can give up some ground tactically, but IT is the place to be because we are of the opinion that there is an economic recovery happening in the US which will lead to rise in discretionary spends and strong dollar revenue growth for these IT companies. That is the reason for the rerating.
The rupee has been a pushup for these stocks to go up significantly in the last three months but the point is the big story is still there, the big story that the economic recovery in the US and stability in the EU. So, I would buy IT stocks on corrections.
Q: What about FMCG and pharma?

A: I would be a bit more circumspect on FMCG because when the Indian economy is trudging along, one cannot expect to have such high valuations. In the case of some of these stocks where there has been an open offer like HUL, the downside might be limited but the issue is it may not make sense to touch it now.
Q: The other space which has got smashed up completely is the oil space ex-Reliance Industries, look at Oil and Natural Gas Corporation (ONGC) at Rs 250 odd, oil marketing companies. How would you approach this beaten down space?

A: Stay away, I will stay away from the oil space.