Beware! Market already at Dec lows in dollar terms: UR Bhat

It has been a tough fight against the bears and Indian market is almost out of breath now. The tug-of-war is far from over and it seems only government's strong impetus will boost sentiment. Worried about the bearish trend, UR Bhat, MD of Dalton Capital Advisors feels that the Nifty may fall to 4700 in the near-term.

According to him, government policy action and news flow from EU are likely to determine market direction now. In an interview to CNBC-TV18, he said that the market is already at December lows in dollar terms. Indian rupee has been making record lows almost everyday. The India rupee went down to 55.75 a dollar (a new all-time high), but immediately came off day's low to 55.65 a dollar, down 0.46% from previous close of 55.39 a dollar as reports suggested that RBI sold dollars. Shifting focus to the world economy, Bhat is expecting another round of Long-term refinancing operations (LTRO) after the Greece elections in June. Below is the edited transcript of Bhat’s interview with CNBC-TV18. Also watch the accompanying video. Q: It is tottering around 4,800, do you expect a knock-out punch anytime soon, which takes it back to the December lows or it will stabilize here? A: In US dollar terms we are already at the December lows. As far as the foreign investor is concerned, he is bearing the brunt as it were, but it all depends on any potential action from the government on the policy front. We have to see how the euro-zone shapes up. I think these are the two important parameters that would be watched very closely. Even on the rupee front, if there is something that brings some order into that market, these are three things that will determine where the market will go. As of now, I think about 4,700 looks like because about 4,600 was the December low. So, that could be a very good important support. But one has to see what is the action coming from Europe, from India and also on the forex front. Q: You are talking about the dollar adjusted price levels; surely it must have been very disconcerting for global investors, the speed at which the rupee has fallen? A: Absolutely, the forex market seems to have some doubts about the economy’s ability to pay for the trade imbalance of something they got about USD 185-200 billion, quite a substantial portion, something like about USD 40 billion comes out of foreign inflows. So, these foreign inflows are not coming except for the first three months this year. Forget about outflows but even if the inflows don’t come, paying for this trading balance is going to be extremely difficult. That is the one that is driving the rupee down and because finally the rupee has to adjust itself to the new realities of not being able to finance the trading balance. Something needs to be done in order to ensure that the people have the confidence that these imbalances would be able to be financed whether it is through international borrowings or ideally through foreign portfolio inflows. Given the post-budget scenario, the level of confidence that investors have in terms of investing further money in the market is somewhat low. That is what is causing a lot of uncertainty on the forex market. I have a suggestion for the government; it needs to do only one important thing, which is that instead of ensuring that there has to be commercial substance in respect of money being routed through countries like Mauritius or Singapore. They just have to invite all the FIIs to open office in India and anyway government doesn’t collect much tax from these inflows. _PAGEBREAK_ So, they can as well say that you establish office in India, no questions asked; we will have a very low level of taxation on short-term capital gains of the order of 1.2% like how the STT was absorbed seamlessly as it were.  Something like this would ensure that people have confidence at least in terms of the certainty about taxation. Q: The next trigger for the market could be the fuel price hike, are you setting your sights on a big diesel price hike etc or keeping your expectations modest? A: It is worth keeping our expectations modest because doesn’t look like as if there will be wholehearted support across the political spectrum for an increase in diesel prices. The government is making the right noises in terms of wanting to do it, but the execution is something that we will have to wait and see. Not worth keeping lots of hopes on that. Q: What is the modest expectation in terms of petrol, diesel, LPG? A: The most modest is not doing anything. Q: That is ridiculous, that is not modest. A: But, the very modest one just to ensure that there is confidence, there is some movement on the policy direction, is that they would do notional sort of an increase. But nothing to absorb the sort of increases that we have seen and the sort of increases that are required. I don’t expect them to go the whole hog and increase it all sort of almost deregulate diesel as is being articulated for quite some time. Q: You spoke earlier about the lack of inflows being the key problem, not so much outflows. How do you describe global investor behaviour over the last few weeks; they have not sold out big time but they are not bringing in anything, what are they doing? A: I think they are keeping a close watch to see how the rupee is going to behave. Finally, it is not just the market that gives them the return. It is also the rupee-dollar parity and there we have floundered quite substantially. If in Europe there is another LTRO sort of situation, which is not very unlikely then maybe there would be some interest. But the government needs to spread a strong message saying that we have certainty in respect of taxation. Postponing general anti-avoidance rule (GAAR) by a few months will not sort out the problem. As I was saying earlier, invite FIIs to India, let them set offices in India, probably create employment and economic benefits in India and tax them at very low rate, 1% or 2%, so that like how STT was absorbed, this also would be absorbed. We don’t need to promote employment and commercial activity elsewhere in the world. We can do it in India. I think these are important decisions that the government needs to take, which gives some comfort to the FIIs. In addition, if Europe goes the wrong way, except that we have short window elections in Greece on June 17; after that I think things will start unfolding. Till then, I think there is some sort of a wait and hold attitude so that is the time I think we need to push the envelope a bit and see that we offer some comfort to foreign investors. This is the most inappropriate time for us to allow some uncertainty to settle down as far as the attitude of foreign investors is concerned. Q: You were talking about the euro situation, do you think an LTRO will come only if you are on the brink of collapse. Will you probably need to see a sell-off in the market or a Greek exit situation for the ECB to take that step? A: We should be somewhere near that step because if the elections on June 17 doesn’t throw any surprises and is a repeat of the earlier result, then the ECB will have to take a hard decision. The point is finally that how do you solve the problem, if exiting euro as far as the Greece is concerned is not solution that anybody is interested in, then pumping in more and more liquidity needs to be done. So LTRO 3 is not entirely unimaginable. I think it should happen. It could happen post June 17 election depending on the outcome. _PAGEBREAK_ Q: What do you think will be the end game for the rupee dollar because the RBI has been barring these small interventions. They have basically let market forces determine the currency over the last one week despite the very sharp fall? A: The end game is for the RBI to bring some confidence to the market that they can control a situation. One of the suggestions has been that oil payments, which are roughly about USD 10-12 billion mark, that can be provided the dollar for that can be given by the RBI directly instead of the market. The market does not absorb it without any volatility and suddenly you have RBI intervention. So instead of all these, it could remove about USD 12-13 billion of demand from the market completely by giving the oil companies dollars directly. That is one way it can be done. I also think the exporters have to get the confidence that this is the level that they probably expect and they should start selling their dollars forward. That is where I think there is a problem exporters are not comfortable. I think there needs to be some sort of confidence building measure required to ensure some stability. It is quite likely that things can go back to normal if there is this confidence; one, on account of the demand being for a net buy from the reserves as far as RBI is concerned. In addition, it needs to give confidence to foreign investors that it will ensure that there is some stability in the market. I think these two things that need to be done. Q: There is a dinner of the EU leaders later this evening. Do you expect anything to come out which soothes the market nerves, any discussion on euro bonds etc or do you think it is very unlikely? A: Most of the announcements coming out of such meetings are always pro-market. But there is some expectation since yesterday that there will be some agreement in the euro bond issue if you see the action in the European markets. That is something that will probably cause some disappointment. I don’t expect Germany to agree to that because finally they are the ones who will have to read in these bonds at the end of the day. Therefore, they are not in any mood to agree to this euro bond issue. As a consequence, despite the language, there might be disappointment after the dinner. Q: What are the chances that some time in the next five-six weeks maybe through the month of June whatever has to happen in Europe happens and you form a low for the year rather than this gradual grind down with every three-four months revising an old low? A: European problem is not something that can be fixed in days and months. It will probably take a long time. That can be done if one more monetary stimulus through another LTRO is done and hope that things will sort out. If you see the US situation, there was a similar problem. After QE1, QE2, there was some element of stability as far as the US is concerned because there is one single point of authority whereas here the authority is sort of defused. So, it will be much more painful sorting out the issue. I think there is no quick-fix solution; I don’t think any solution will come over a month or two. They will try to delay the inevitable as far as possible through monetary injections. For the next one year, we will have to live with this uncertainty that is likely to be there in Europe. The ultimate solution is for austerity measures to be imposed very strictly in countries like Europe, Spain or Portugal. There is some light at the end of the tunnel being seen that things will get back to normal over the next three-four years. If that confidence comes, things will get back to normal. But for that to happen, I think we will need to give some more time. Q: Are you buying anything right now or staying with an ultra defensive stance just focusing on preserving capital? A: I think that is the biggest battle now; preserving capital is the biggest battle especially in dollar terms. I think it is ideal that we need to keep protecting ourselves through some options. Otherwise, you need to be invested because on valuation terms, everything looks attractive.