Global risks may spark sell off; RBI rate view key:Axis Cap

Mehta said he expected market to hit new highs by end of this year though it could be volatile in the short term for 'primarily the money was coming from overseas'. He said global risks could trigger a sell-off by foreign institutional investors (FIIs). After a rally in 2014, market was seeing a phase of consolidation now, he said, adding that investors preferred to put money into large caps.Foreign investors are marginally disappointed with India and they still need clarity on retrospective taxation, he said. The controversy over Minimum Alternate Tax notices to foreign investors led to capital outflows recently.

In addition, investors are also awaiting the passage of the GST and Land Acquisition Bills he said. 

“The good part of the government is that they have been very communicative, they have been meeting investors”, he said.

People have high expectations and want a speedy execution from Modi Government, Mehta said.Axis Capital's deal pipeline is strong and the company plans to enter new businesses, he said.

Below is the edited transcript of Dharmesh Mehta’s interview with Reema Tendulkar and Sonia Shenoy on CNBC-TV18.Reema: Before we ask you about the conference, first a word on the markets. One a year-to-date (YTD) basis we are absolutely flat, in fact we have underperformed compared to most of our peers. Do you expect markets to be in consolidation phase for some more time?A: When we have had such a great rally last year, you expect the markets will stabilise in the next year going forward and the easy macro call of India going up is behind us. So, now there will be some kind of consolidation phase and then we will move to the next stage of growth as soon as we see things happening on the ground.Sonia: yes, that is what even Abhay Laijawala was just telling us that we have not seen any improvement on the round just yet, but next week we have two important triggers in terms of Morgan Stanley Capital International (MSCI) re-balance where India’s weightage goes up and credit policy. Can either of these triggers turn near term direction of the market, you think?A: MSCI is more of a technical re-balancing which will just be a one time event and go away while the bigger important one will be the RBI’s credit policy. That is at the tone of the market for future and depending what kind of guidance does the RBI gives, whether they cut interest rates or they hold it back looking at monsoon coming on the way and they do it after that, that will be very crucial for the further growth in India.Reema: What do you expect from June policy? What is the in-house view in terms of rate cuts later this year?A: House call has always been that the interest rate cycle is on the downtrend. You may still see some kind of a slow down or some pause because there are a lot of global factors which affect the interest rate cycle like the oil prices, then we will be getting into monsoons, the economy overall so. There may be some kind of a pause or a delay but overall the trend is definitely going downwards. Hence, we are very confident that the interest rate in India is going to be down from where it is currently today.Sonia: Now coming to your conference now, you must have met lot of global investors. What's the mood towards India now? Has the mood soured compared to what it was about six months ago?A: There is a kind of a little bit of a disappointment on the speed of executions because the expectations were rocket-high but definitely India is in the top-investable markets for them. And that is why the current correction actually gives them a good opportunity to look into India and re-invest. And there are lot of people who overweight India, so that kind of has been, there is little bit of selling has happened through these funds and there were a lot of other investors who actually missed out on the rally in India who have started coming back again. But the bottom line is people are still bullish on India. It is a matter of time when they come back into the markets in a big way again.

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Reema: In the event of a global risk-off, do you see the gem funds being overweight India as a key risk to our markets?A: Part of the correction that happened has already seen that those kind of funds are already selling in the market. So that some kind of things are already taken care of. But, yes, there is always going to be a global volatility which will affect the Indian markets, because primarily the money is coming from overseas. But I would say that that will be a short-term correction. India is right now in a higher-top, higher-bottom market, so you are going to see these corrections which will make higher-bottoms of the markets. And as soon as things are stabilised in the global world and overall in India, you will start seeing markets reaching new highs again.Reema: In the event of a global risk-off, do you see the gem funds being overweight India as a key risk to our markets?A: Part of the correction that happened has already seen that those kind of funds are already selling in the market. So, some kind of things are already taken care of. But, yes, there is always going to be a global volatility which will affect the Indian markets, because primarily the money is coming from overseas. But I would say that that will be a short-term correction.India is right now in a higher-top, higher-bottom market, so you are going to see these corrections which will make higher-bottoms of the markets. And as soon as things are stabilised in the global world and overall in India, you will start seeing markets reaching new highs again.Reema: What the sense that you get from investors towards the Modi government now? We have completed one year, have they lost patience? Are they happy with the kind of performance that the government has put in, in the last one year?A: I will not say that they are losing patience, but obviously they want things to happen fast. The good part of the government is that they have been very communicative, they have been meeting investors, I believe the finance minister was here in UK just a few weeks back and the other ministers have been coming around.So, they are clearly hearing from the horse’s mouth what the government is planning which gives them that confidence and obviously their expectations are high, so they would like a faster, speedy execution of it. But I would say no way that they are disappointed and they will not come to India because of any other factors.Sonia: What are the key reforms that investors are watching out for in the near-term? We have seen a lot happen on the coal front or the power front, but going ahead what are investors expecting?A: The key reform obviously is the land bill, the goods and services tax (GST) bill, that is what people would want to, like to understand when and how it will be executed. Clarity on the foreign investor (FI) taxation issue which was a big issue for everyone. But that is settling down with the kind of comfort the government has been giving. But still the sword is hanging, so unless they do not hear the last word on it, they will not be satisfied. And overall general atmosphere by the corporate where a lot of positivity starts happening, they are looking at those kind of micro-factors which will kick-start the entire economy. And especially when does the bank start lending back to the corporate sector in a big way? That will be the key indicator that things are happening on the ground and capital expenditure (Capex) implementation just started which so far people have not been hearing on the same.Reema: Last 12 months have been good for capital raising in India, in fact, Axis Cap was awarded the best investment bank, best Equity Capital Market (ECM) house and Debt Capital Market (DCM) house by Finance Asia this week. So, how is the pipeline looking for the rest of the year?A: Pipeline is fantastic and we got a lot of mandates which are already signed; maybe one of the highest in the country and the good part about those mandates are they are all different sectors, different businesses, there are a lot of new businesses which will come to the capital market, which a lot of investors are waiting to buy into and team has worked very hard over the last one year and Axis Capital has executed the maximum number of ECM transactions as rightly we have been awarded for that and on the investment banking side too.

So, it is very exciting times ahead and we are looking forward to it because as I said, a lot of new businesses and new companies should get listed which is what everybody looks for.Sonia: Do you see enough appetite for government paper, especially for a lot of the disinvestment candidates?A: At a price everything is sellable and we have seen large blocks happening in this country and we have seen the largest block, Sun Pharma going through in one day and so many other names.

So, clearly if there is a good quality paper at a good price, there is enough demand to come into place. So, I am not too worried on the divestment size or the kind of stocks which are going to come to the market subject to the timing is right and the valuations are right.Reema: You are profiling a lot of interesting midcap companies at your conference; the likes of Arvind, Cox and Kings, Dalmia Bharat, Redington, etc. How is the interest towards Indian midcap companies currently?A: Obviously first people would like to buy into largecap because of the liquidity criteria, but as they know the largecaps are very fairly valued in the country, midcaps are attracting a lot of people, especially the finds which are much more high-risk, which have a high-risk taking appetite, they definitely would like to meet a lot of this midcap companies and invest in them and you have seen the response has been fabulous.So, it is clear the India story which people are very bullish on, midcaps always going to outperform the largecaps if you are bullish on India and that call goes right. So, the clearly the interest is very strong and we are getting good response for the same.