RBI steps to hit growth, don't touch banks now: Baer Cap

The recent measures taken by the Reserve Bank of India to curb rupee volatility has negative connotations for India’s growth, but will help strengthen the rupee says Alok Sama, founder, Baer Capital.

In an interview to CNBC-TV18, Sama says given the steep fall seen by the rupee, growth has now taken a backseat. "RBI has less flexibility than it may have been the case few months ago. The implications quite obviously for the growth picture at the margin are not positive but the focus on the currency is spot on," adds Sama.

Also read: Central Bank of India hits 4-year low on poor Q1 numbers

Additionally, Sama says that banking stocks hold good buying opportunities if one assumes that the RBI will be successful in defend the Indian currency.

Below is the edited transcript of Sama's interview to CNBC-TV18.

Q: What have you made of all these apprehensions of growth that have come back, all these Gross domestic product (GDP) forecast slashes that have materialized over the last couple of days after the Reserve Bank of India (RBI) action?

A: First of all, from RBI's perspective it is not right to say that it is not concerned about growth. I think any central bank always faces a delicate job of managing the growth versus inflation trade off. In India, the near-term complexity is that we have got a real threat of run on the currency. So, I think some of the concerns about growth, rightly so, have taken a backseat.

However, the point is that at the margin, the implications for growth are not robust. I had earlier expressed some degree of optimism about an improving growth picture. I thought we were at the bottom of the cycle in terms of growth picture for India. I do think that view needs to be tweaked at the margin because of the currency concerns. RBI has less flexibility than it may have been the case few months ago. So, to summarize the implications quite obviously for the growth picture at the margin are not positive but the focus on the currency is spot on.

Q: These decisions have created the sharpest cut on rate sensitive sectors, spaces like banks. How would you approach them now?

A: Yes, given the lingering uncertainty over the rupee and where the RBI is headed, I think atleast in the near-term banks are not a great spot to be in. For a few weeks we're probably in a mode where we have a bi-polar market where it probably makes more sense to be defensives.

FMCG, consumer oriented stocks make sense now and it probably makes sense to stay away from banks. However, I do think if one buys the thesis that RBI will successfully defend the rupee that these concerns will go away, then somewhere in the next few weeks there is a massive buying opportunity. If one assumes that the rupee concerns go away and RBI can go back into a mode where we can alleviate concerns of cost to capital and the growth picture and rate picture becomes more robust, then I think it will be a great time to be buying banks but not in the near term.

Q: Till then do you expect this kind of very bipolar nature of the market to continue, sectors like FMCG, IT continuing to get more expensive?

A: Yes, in the near-term they will get expensive. Those stocks in the multiple terms are high even by historical standards. But atleast in the near-term, I think it’s a reasonable place to be in. However, somewhere in the near-term, there is a massive buying opportunity where I think it makes sense to be more aggressive in terms of buying banks and cyclicals.

Q: It has been a fairly poor earnings run so far on that point you were making about seeing a trough, have you seen any confirmation of that in earning season so far?

A: I think the earnings and growth picture is a discussion one needs to have at the margin relative to people's expectations. People's expectations about growth and earnings outlook for this year are fairly downbeat, frankly more downbeat than it has been the case for last three-five years. So , the fact that earnings are going to be below par shouldn't come as a surprise. The fact that the growth picture is sluggish relative to where it has been over the last few years, is again no surprise.

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I for one believe that a lot of that is built into market expectations. The political picture really cannot get any murkier than right now, we are going to be an area of coalition government in the foreseeable future. The growth picture was pretty close to as bad as it gets in terms of the pessimism that is coming out of the Indian market both anecdotally and statistically. So, a lot of things are coming together to suggest that we are still pretty close to the bottom of the cycle. I think the near-term shock about the rupee has shaken things up a little bit and thrown a bit of a googly. But I do think that is going to go away and we can return to a more solid expectations about an improving growth and earnings outlook.

Q: What about the global macro now, how are you mapping that and liquidity implications for emerging markets like India?

A: The global macro picture is anything but homogenous. There’s the US which is the biggest single market and its picture is increasingly robust. Housing is fairly fundamental to the US story and housing fundamentals are improving and that is very meaningful in terms of what it means for a recovery in US markets, not just in terms of what people spend on new construction, buying homes etc, but there is a wealth effect too.

Also read: Is China about to launch a new round of stimulus?

For most American consumers, their main savings vehicle is their home and as home values improve that will help consumption in the US and the US consumer has over the last 10-15 years been a key engine of global growth. So, I think that is constructive.

The picture on the other hand in Europe is anything but robust. So, I think in Europe and UK, one is resigned to extraordinarily sluggish growth not just for near-term but for potentially next two-five years. So, the monetary policy will be exceptionally accommodative. Quantitative Easing (QE) is here to stay and so the picture is not that great.

Japan is on a different planet with Abenomics and what is going on there is arguably unprecedented and frankly dangerous monetary experiment in terms of what they are planning to do with expansion of monetary aggregates. So, it is very unclear how Japan folds out other than the yen getting inevitably trashed. Hence, the global picture is uneven but I do think the picture in the US is robust. So, I think liquidity, risk appetite will be directed towards US and less so towards Europe and EMs generally.

 Q: How are you looking at Larsen and Toubro (L&T) now after the poor numbers which came in the stock reacted quite violently on the earnings day?

A: I think in general when one is talking about infrastructure, EPC contractors, companies like L&T, there have been two issues. One is the cost of capital, the working cap cycle which has been a significant concern and the other has been the overall growth picture and a government that has been somewhat sluggish in terms of doing what needs to be done, approval of contracts, etc.

Corruption has been an issue so that has put a spanner in the works. So, I do think the one that recedes, that is the place to be in. That is at the heart of India story. So, I think near-term concerns not withstanding, longer-term that is still a very good place to be in.