Foreign investors to stay even if Rajan exits: JP Morgan

Raghuram Rajan has done a very good job at helming the Reserve Bank of India (RBI) so far, and "many here would be sad to see him go,” says Ian Hui of JP Morgan Asset Management.  

But, after the RBI’s monetary policy meet today, Ian Hui told CNBC-TV18 that foreign investors will not pull out of India because of governor Rajan’s exit.

Talking about the equity market, Hui said that valuation is still not a concern for India but he is hoping for an improvement in the earnings scenario, if it deteriorates going ahead then he might pull out of the Indian market.Below is the verbatim transcript of Ian Hui’s interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy. Latha: Are you any the wiser of whether the governor will continue? A: He has made it very uncertain in which way he would go. For the moment we will also have to wait and see. He will have to decide obviously with the current officials whether he wants to stay on or not. I know there are simply all rumours floating around. From my point of view Rajan has done a very good job as helming the Reserve Bank of India (RBI) so far. Many here would be sad to see him go especially with the effort he has made to control inflation, reform the bank, make sure the government on the current reform path but since his latest statement doesn't give much of a direction we will also have to wait and see with the rest of India. Latha: A lot of Foreign Institutional Investment (FII) debt money flowed into India last year, about USD 40 billion and that was largely because for the first time we had the RBI promising that it will work from 8 percent inflation to 6 percent and from 6 percent to four percent inflation. Basically the monetary policy framework was put in place. Now with the change of stance at the RBI will these debt funds be a little wary that the pursuit of 4 percent maybe given up? A: I don't think so because 4 percent might be still fairly hard from today, we are still about a bit above 5 percent inflation. At that time when they were talking about reaching the 4-6 percent target people were still very sceptical around then as well. They were still sceptical whether the deficit will be under control and they were sceptical about whether inflation will lower from there to about double digit around that time. We see eventually it did come down. There is still a little prospect. Yes, inflation might still be bit worrisome. We are starting to see perhaps commodity prices still rise. Last April figures for India's inflation due to food prices that sort of picked up a bit. But I don't think that it is totally out of the question that they won't get their 4 percent target. It still might get a bit difficult certainly considering as I mentioned the commodity and food price situation but still you can possibly be optimistic. Sonia: What about the equity markets. I heard you mention that it would be sad to see governor Rajan go, but the bottom-line is that an institution is far bigger than any individual. So, in that sense do you get a feeling that this event could pass and the equity market in India may not be too perturbed? A: As you mentioned like as long as I think the various reform measures and for the RBI policy doesn't certainly take a surprising shift for the worse it is still quite supportive of what is going to happen in India. It won't necessarily mean that foreign investors will pull out of the Indian markets. Latha: Will you pull out of the Indian markets because of the valuations at this point in time? We have seen the markets go back to their August highs basically after that first Chinese shudder we got in August 2015. At this point in time are Indian shares fully valued or overvalued? A: Valuation is still a bit of a concern for the Indian market. I am still hoping for an improvement in the earnings situation, we still haven't quite seen that yet. I wouldn't pull out quite yet out of the Indian market. I would still wait to see what happens at the earnings. If it still continues to be a negative story there then I might start worrying. There are few quite a number of concerns, not just in India but elsewhere, what is happening with US, China. I still wouldn't pull out of the Indian market quite yet. Sonia: A lot of FII or foreign investors have indicated to us that they have increased allocation to India over the last 2-3 months. Have you done that, have you upped your allocation to the Indian markets and if yes, what is the sectoral approach? A: We are still neutral on India but I do think it is still fairly a wise decision to increase global allocations elsewhere in other countries especially with the uncertainty about what is going on with the US right now. It is quite a prudent option to sort of invest elsewhere besides a sort of major market. So, India was still neutral as I mentioned. The earnings talks, the valuations still not really that positive to be overweight but it is still a wise option to go into other markets. Latha: Which stocks would you pull out of then? Which stocks in the Indian market look overvalued to you? A: I don't really comment on the individual stocks but sector wise there is still some positive in various sectors. Perhaps various sectors that would both benefit from the various reform measures from the government those that would benefit in like the financials from the various attempts to sort of reform the bank sectors improve the access to banking to various sectors of the Indian population. There will be other sectors as well, sectors where the Indian economy is a lot more competitive such as the IT sectors compared to some of the other emerging markets which are being more reliant on the commodities. So, there are still some positives in India.