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Daily Voice | Robust recovery, macro numbers to push for fiscal consolidation, says Janakiraman of Franklin Templeton

The RBI is likely to narrow the policy rate corridor through a reverse repo hike in Q4FY22. Key risk to this assumption is weaker than anticipated growth which may push policy normalization to a later time.

October 13, 2021 / 07:44 AM IST

A sharp swing in corporate earnings for 2020-21 and a strong demand recovery in real estate indicate that the growth momentum that India has revived after the Covid crisis will sustain over the medium term. That's what Janakiraman Rengaraju, VP and Portfolio Manager for Emerging Markets Equity - India at Franklin Templeton, believes.

The robust recovery in tax collection, improving levels of compliance and better macro growth will help the government revert to the earlier path of fiscal consolidation, he says.

On the earnings front, he feels, continuing economic recovery will help sustain the momentum in the second quarter of FY22. "Metals, banks and IT are expected to lead earnings growth," he says at an interview with Moneycontrol. Excerpts from the interview:

Moody's has changed India's ratings outlook to stable from negative. Does it mean that risks for the financial sector are lower now along with visibility of sustained growth and gradual fiscal consolidation?

The concerns around growth recovery and asset quality for banks after the second Covid wave are largely fading out for the financial sector. On the positive side, some lead macro factors point towards an increasing momentum as indicated by improving monthly bounce rates (zero-day delinquencies), uptick in loan growth and improving collection efficiency. On the other hand, delinquencies remain relatively high in the NBFC segment. On the whole, it appears that recovering the GDP growth has moderated risks for the financial sector.


It may be recalled that India entered the pandemic crisis on the back of a weak phase of macro growth over the preceding two years. Besides, corporate balance sheets have seen surprising improvement in FY21. This is conducive for corporate capex spend. And the real estate cycle signals a demand recovery. These factors indicate that the growth momentum that we gain post-Covid can sustain over the medium term.

During the crisis, the government allowed the deficit to expand and quite justifiably so. And with economy starting to normalise, markets will train focus on fiscal consolidation once more. The robust recovery in tax collection, improving levels of compliance and better macro growth will help the government revert to the earlier path of fiscal consolidation.

US Treasury Secretary Janet Yellen has warned that a US debt default could trigger another recession as an October 18 deadline comes close. What is your take on this?

A delay in raising the borrowing limits on the part of the government, however short lived, could lead to a chain reaction and disruptions at multiple levels. If investors continue to believe that US treasuries couldn't default, the initial response to delay in raising the debt limit may be mild. However, if the indecision were to prolong, investors and markets would come to anticipate delays by the government in addressing this situation in future. This could begin to weigh on financial markets as well as business and consumer confidence.

A longer delay in resolution could aggravate the pessimism about the impending default on treasury securities/ recessionary fears led by potential spending cuts, impacting the financial markets, general business at large and beneficiaries of social security schemes. The cost of credit for households and businesses could rise. Ripple effects could be seen on business confidence and subsequent business expansion, hiring and unemployment levels. These factors could lead to a mild recession.

Several PSUs, including oil, power and coal, saw big run-up in stock prices. What are reasons for this rally? Is the under-ownership one of reasons for the run up?

The increasing pace of re-opening of global economy led to a sector rotation and value stocks, including PSUs, were the beneficiaries. The de-rating in PSU basket till last quarter was led by inaction on the part of the government to proceed with divestment. Meanwhile, the ongoing rally widened the valuation gap between private and PSU players. Now the focus has shifted back to the PSU segment with renewed talks of disinvestment and the added benefit of relatively cheaper valuations.

Also sector-specific factors contributed to the PSU rally. Rising fuel prices augured well for energy sector PSUs such as ONGC, Coal India as well as for OMCs like HPCL and BPCL. With indicators incrementally pointing at economic recovery, large banking PSU stocks were positively re-rated, also aided by improving credit growth and operating efficiencies.

Is the RBI coming closer to the exit policy? Do you think provide adequate cues on the likely glided path of normalisation?

Growth recovery is still nascent and continues to be at the centre of the MPC (Monetary Policy Committee) deliberations. As reaffirmed in the policy, we continue to believe that the RBI may embark on a gradual exit from the prevailing loose monetary policy by reducing the short-term liquidity through measured increases in the VRRR (variable reverse repo rate) and by discontinuing G-SAP (Government Securities Acquisition Programme). Subsequently, we expect the RBI to narrow the policy rate corridor through a reverse repo hike in Q4FY22. Key risk to this assumption is weaker than anticipated growth which may push policy normalisation to a later time.

What are your broad expectations for September 2021 quarter earnings? Will these quarterly earnings help analysts revise upwards FY22 and FY23 forecast?

Continuing economic recovery is expected to sustain the momentum of earnings trend in Q2FY22. Metals (higher price realisation), banks (improving credit offtake in retail and SME segments, festive season demand) and IT (strong demand and deal pipeline) are expected to lead earnings growth. Resumption of business activities and resurgence in demand are expected to bode well for housing segment, thereby boosting earnings in the Real estate and materials sectors. Rise in commodity prices could continue to impact select sectors including auto and consumer durables.

What are the key factors one should consider before picking stock and create a portfolio of stocks?

Businesses that score well on sustainable growth and profitability should form the bedrock of a portfolio. While past growth trend is always available for reference, it is the future sustainability of that growth that matters.

Management quality and their vision for the business are key factors determining this growth trajectory. Competitive advantages of a business are important evaluation points to screen stocks. This bottom-up approach allows identification of effective investment ideas across sectors.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Oct 13, 2021 07:44 am

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