Major panic from FIIs over P-notes unlikely: Ridham Desai

The SIT recommendation to go after P notes to stem black money is unlikely to impact market, says Ridham Desai, managing director at Morgan Stanley in an interview to Udayan Mukherjee. He is confident that the government will make a studied decision on the issue and rules out the possibility of the FII community panicking over P note issue. Desai, on the other hand, is worried that if GST Bill does not get passed during the Monsoon Session of parliament, it may hurt sentiment. But that is "short-term" glitch in the 3-5 year bull run, he says. Below is the transcript of Ridham Desai’s interview with Udayan Mukherjee on CNBC-TV18. Q: The irritant which has cropped up, which is this whole business of the Special Investigation Team (SIT) probe into participatory notes (P-notes) originating out of Cayman Islands. You remember a few years back when this whole P-note thing happened, how much havoc it caused in the market? Do you have a sense of where this one, how this one might play out and whether it might unleash any kind of damage to sentiment and to foreign flows? A: It is premature for us to react to this frankly, because it is amongst the many things that the SIT has pointed out in its attempt to stop black money flows, so I think it is too early. I think the government has some has since then issued a clarification that nobody should jump to any conclusions, that any action will be taken after careful thought. The government had the experience with the minimum alternate tax (MAT) issue that dealing with this in a casual fashion can create a lot of impact on sentiment. So, we should expect from the way the government rectified the problems with the MAT issue that this time around, they will be a lot more careful before any actions are taken. But, overall, I think it is too early for us to actually react to this. Q: Is it a potential irritant though? Would you expect worried calls from clients? Is it something that will engage your attention as a brokerage house over the next couple of days? Would you expect to hear any voices of consternation from your clients? A: No, I do not think so, not immediately. I think people will like to see what details are following up. Just the mention of P-notes as a potential source for black money, I do not think is going to worry too many people, especially because a lot of them actually have credible flows that are coming through. So, I do not think they need to worry. Those who may not have credible may have to get worried and they may actually not be part of our client base, so I do not think I expect any major panic from our client base. Q: You have been quite bullish about the market and one of the planks of your bullishness is kind of affirmative policy action from New Delhi that you are expecting over the next few quarters and years. In that, the way parliament has moved this time and first fear that maybe a key policy thing like goods and services tax (GST) might get delayed beyond its implementation date. Is that causing some worry for your investors that maybe, policy action may not be allowed to flow as smoothly as people might have begun to price in? A: Certainly, I think the logjam in Parliament is not good news for those who are expecting GST to be passed in this session. I think that is the large scale expectation of the market that the GST Bill gets passed in this Monsoon Session. It is imperative that it gets passed for the government to meet its April 1, 2016 deadline. If it does not get passed in this session, that deadline will look very challenging. So, to the extent that the parliament is not functioning is a cause for worry. Now, as such, if I take a slightly longer-term view, the GST tax law change is a sweeping reform. Probably, one of the biggest that we have done in 20 years. So, whether it happens in April, or it happens in June, next year is not going to materially change the outlook for India’s long-term story. But certainly, it could damage sentiment in the short run. So, we have to be careful about that. And if the government is not able to pull it through in this session, then there could be some risk to near-term share prices. The long-term, I do not think gets affected, even if it gets delayed by 3-6 months. Q: I asked because these government policy things have a habit, given our political landscape of moving in bursts, you will have a lot of actions and then, there will be a bunch of assembly elections and then nothing will happen and then something will happen and then a burst again. I am sure you are watching the Bihar elections and the few assembly elections which are lined up after that, which are fairly close to call. Do you think, given that, timing is important of how much the government is able to push through right now before the clutch of those assembly elections and how they may turn out? A: I think there are two parts to this. The first part is what is happening on the executive front. Those actions are far more material to say the growth rate India will experience over the next 12-24 months. The second part to this is the legislative changes that have to be pushed through to the parliament. Those changes are more material from a longer-term perspective. So, so far as the executive action is not stalled and I believe it is not, a lot of the data that we receive suggests that if anything, executive action actually has been progressing at strong pace. I think the market will be okay, because the market will then receive good growth data points which is what the market cares for. Of course, along the way, the market will also want that some of this legislative agenda gets fixed because that may have an impact for the longer-tem stories and to that extent, the point that you make on the impending elections in Bihar and the other elections that will come up next year could become an impediment especially because, as you point out, Bihar is too close to call. I have not done the analysis on the Bihar elections. I think it is still very early for us to actually take a call on that. But, given the aggregation of the opposition in Bihar, it looks like it is going to be an interesting outcome and it will be a difficult one to call because it will be a binary outcome. So, to that extent, of course, these things will come along the way. The bottom-line point that we should focus on here is that we may be and that is what my view is in a 3-5 year bull market. Now, along the way, are we going to experience certain patches of uncertainty, certain patches of doubt? Certainly, we went through that, we went through one such rough patch in the months of March, April and May. We came out of it in the end of June. We may enter into another rough patch if there is a logjam, continuing logjam in Parliament and if there are adversal state election results. And those will be opportunities for long-term investors to engage in the market. So, I think, if we use that as our operating scenario, then we should not worry about these short-term glitches that keep coming along the way. But if your question is, are we going to get them? I think, certainly, we will get them. We will get a lot of glitches along the way and share prices will react to those. Q: Now, let me ask you about this very point that you have raised - the glitches or the rough patches. If you think that we are about to enter one such rough patch at some point or a glitch, what is more likely to precipitate that glitch? Do you think it will be something local like, this lock jam in parliament, SIT probe, etc. that we have discussed so far or could the genesis of that be something global given the kind of very rough data that we are hearing from China, this home sales data in the US? Do you think there could be some global panic which precipitate that? If you had to put your money on one of the two being the reason for this glitch, which one would you put it on? A: If I get anchored to what happened between March and May, it was actually a mixed bag of both and global led local factors. But, let us evaluate this which is a very interesting question that you have asked. I hear the world is suddenly looking a lot murkier than India is. You point out to the growth in China, the possibility of a Fed rate hike, the problems in Europe, I do not think these are getting solved in a hurry. So, they will keep recurring and they will keep incurring damage to equity share prices along the way. India has done a lot to fix its macro stability risk. We have come a long way from 2013. Fiscal deficit is down, the current account deficit is down, inflation expectations are down, real rates are up. So, if you look at what happened in the month of June, particularly when there was a global risk-off on the back of Greece and then kind of China growth-scare. India actually behaved like a low beta market. This low beta characteristic actually comes from the fact that India’s macro stability is a whole lot better than its peer group as well as a whole lot better than what it was two years ago. The symptom of this macro stability improvement is that domestic flows are very strong. So, we have outlined this story a few weeks ago that we think that we are in the midst of or at the beginning of a super-cycle in domestic liquidity into equity shares into India. That story will play out over the next several months and quarters.