Focus should be economy, not financial mkt alone: Tandon

Tightening of interest rates should have been done way back in the past. This time, the hand has almost been forced to defend the currency, says Anand Tandon, CEO, JRG Securities.

Talking to CNBC-TV18, he says that there has been too much focus on the financial markets and not on the real economy. The focus should be on the private sector and getting projects off the ground, rather than bothering about the when the central bank will cut rates, he says. 

Below is the edited transcript of his interview with CNBC-TV18

Q: There have been a range of developments overnight by the Reserve Bank of India (RBI) on the currency. What did you make of all of the takeaways and the reaction that we have seen on separate asset classes starting with equities, bonds as well as the currency?

A: The second part is easy to answer. If interest rates were to harden and liquidity were to become a less easy, the banks will take a tumble, which is what we have seen happening.

The question is whether that was necessary or not. I have always been of the view that we should have been tightening interest rates way back in the past and we are too late.

This time, the hand has been almost forced because this is now a question of trying to defend the currency rather than insuring that we had real interest rates,  so we wouldn’t have got into this mess where local savings have had to look overseas, forgetting a decent yield.

Therefore, it has become a forced kind of issue but it is something that had to be done and I am glad that the Governor went ahead and did it.

Q: It has been a very tough move for the RBI to shore up the rupee but how do you see growth getting impacted in some of these rate-sensitive sectors from a stock market watcher point of view? Would you hold back if you are planning to accumulate into some of these banks or real estate or even some of the infrastructure counters?

A: If you look at growth, it has been slowing down quarter after quarter and if you look at sales for the current year, we are now looking at some expectation at least.

The consensus seems to be that it will be the worst kind of growth that we have seen in the topline in the last 15 quarters. So, it is not as if growth will go any further down from here. If at all, the stock market which has gone well ahead of itself, should correct because we are still pretty much near where we have been near its high, whereas the economy is probably near its low.

So, the excess money that has been driving valuations will have to correct somewhat before it becomes meaningful and catches up with the underlying stocks. 

Now, will you see a major impact in terms of earnings; I would very much doubt it. I think again and again we have mentioned that the real impact on the economy is the fact that there is too much focus on the financial markets and not on the real economy.

We need to get the real economy start working, the amount of money that is locked-in in the private sector and projects which are just not getting up the ground, it is more important to get that rolling than to bother about the fact that we will get 25 bps cut.

Q: Where do you think all the macro economic as well as the equity market reactions will leave the foreign institutional investors (FIIs) and their view towards India only on a fundamental basis. What would your perspective be in terms of the FII view towards India on a standalone basis devoid of what is happening globally?

A: I am not sure you can pullout the two factors separately but if you were to try, the FIIs have to be classified into various segments. You have the long-term investor who is looking to figure out a higher growth market as opposed to just trying to allocate assets, India will remain a story which you cannot get out of for them.

Obviously, they have seen a big hit. If you been investing in pension funds for the last ten years, your biggest challenge has been that in the last three-four years, you have seen 50 percent erosion in dollar terms, and your returns are not going to look good in your books.

However, there are equal, if not larger number of investors who invest purely on asset allocation basis. That is where the carnage comes in because as the interest rates globally go up, the arbitrage between the domestic and international markets become very narrow and you have to have money going out of the system, whether it is through ETFs or through any route where the arbitrage has been played.

That is the part that dried up the flows in the last couple of months. So, it’s not as if the FIIs will look at India in the same way, each one of them has their own target. I do not think fundamentally things have changed for either of them.

The first one is a long-term investor and will look for growth, India will remain over a long cycle, more attractive than many other markets. The second one will look for asset allocation moves and will always be a fecal investor.

Q: The first of the auto sector earnings have been quite horrific to say the least with Ashok Leyland reporting a big loss, but how long do you think the auto sector would go through pain and which is the stock or company that you would be more skeptical about or most concerned about now?

A: Ashok Leyland was one of those which was doing very badly because one part of their portfolio which was doing somewhat well has started to show signs of decline.

If you look at the domestic market, Tata Motors will follow because even their HCV segment was never doing well and their car portfolio doesn’t inspire confidence at least in India.

Q: What would your opinion be in terms of couple of these banks because this week is going to be heavy in terms of banking numbers. We have the likes of Axis Bank releasing results, Kotak Mahindra Bank, Development Credit Bank (DCB) is coming out post market today. What would your view be on the entire banking space in terms of earnings for this quarter?

A: This quarter will be a bit of a challenge. So far, we have had all banks which were retail-based doing quite well and those lending to the industry doing quite badly.

We have seen kind of slowdown in the consumer space as well and I would imagine that it will get reflected in the banking numbers. There will be some level of slowdown there and we should also expect to see a bit of net interest margin (NIM) correction, some amount of squeeze there.

Barring companies like HDFC, which has very high current account-savings account (CASA) ratio, many of the other banks especially some of the new private sector banks will have a bit of a challenge. This is because the CASA ratio is perhaps not as good and therefore the cost of funds also start to look up especially now given the RBI’s latest move.

So, this would be a quarter where the numbers would be middling, and you are unlikely to see a runaway rally emerging out of this.