The key concern right now is the global economy which is up against events like the Brexit and situation in China and Japan, says CNBC-TV18‘s Consulting Editor Udayan Mukherjee. If market has to rally, if global market permits, Bank Nifty will lead, he adds.
With Reserve Bank chief Raghuram Rajan not willing to continue after September when his first term ends, some knee-jerk market reaction is expected, but nothing major, says CNBC-TV18’s Consulting Editor Udayan Mukherjee.
“(Rajan leaving) it is not a good move; it's an anti-reform move,” he says. However, he adds that the move isn’t “big liquidity exodus kind.”
If Brexit gets out of the way and monsoons are good, the Nifty could return to 8300-8400 levels.
The key source of worry is global economy, says Mukherjee. India story is coming back into place with improvement in earnings and other indicators. If market has to rally, if global market permits, Bank Nifty will lead, he adds.
With Rajan leaving, two major concerns loom over the economy - first one is stability in the currency market and second, banking sector reforms. Besides these, global concerns continue to weigh on the economy, says Mukherjee.
On the topic of RBI’s next chief, Mukherjee says a PSU banker or an academician is not the right one for the job as somebody with a global pedigree is needed right now.
However, the FII or DII investment in India will remain unaffected by the news.
Below is the verbatim transcript of Udayan Mukherjee's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: Rakesh Jhunjhunwala tried his best to convince us that the markets will move on and the skies will not fall, what is your own view?
A: Have we ever heard Rakesh Jhunjhunwala not being bullish on the markets? I don’t remember that but I sort of partially agree with him that I don’t think it is a major market event this morning and we should have a major knee-jerk reaction. I think that would be very short-lived if that were to happen either in the currency market or in the stock market.
I think the medium-term implications are far more important. I don’t think you should just wish away the fact that this is not an important matter that individuals don’t matter in institutions like Central Bank.
You cannot say that Alan Greenspan and Ben Bernanke were cut of the same cloth and that their legacies continued regardless of their individual personality traits. So I think for the Central Bank, individuals do matter.
You should just turn this question around ask those people who are talking in bullish terms today or positive about the event that if Rajan got an extension whether they would have said that this would have been a cause for a market rally, they would have thumb the table and told you that this is excellent news, great reform move by the government and this just endorses the fact that the government is very pro-reform and pro-policy but now that it has not happened, it is not that important.
So I don’t think you can have it both ways, it is not a good move, it is an anti-reform move and should not go down very well with investors. Whether it means, we should have a two-three-four percent fall in the market immediately that I am not very sure about but the medium-term implications might be more serious than today's market action.
Latha: Even my fears are in the medium-term and in the long-term as to how much of Rajan's legacies will be continued and also in the immediate-term in terms of perception of the government itself, how will these fears play out?
A: I don’t know. I think the answer is global. Everybody right now in the global market who you are afraid might sell because of this event has too many other things on their plate.
Two days later, there is a Brexit event, which may or may not happen. If we cross that hurdle then I think everybody is watching what the Fed will do because if Brexit does not happen, it may pave the way for Fed to raise rates in the month of July. So there are many more important things at this point in time, which will determine risk-on or risk-off for global investors.
You might see a little bit of sentiment led selling here or there but I don’t think this will call -- as I said last time, I don’t believe that piece, which was written by one journalist suggesting that tens of billions of dollars will leave the country because Rajan is not reinstated. I don’t think we will be anywhere close to that.
So this is not that big an liquidity exodus kind of an event but in the medium-term, it might have ramifications, which are not very good and it certainly tarnishes the perception of a government which was being regarded slowly as far more pro-reform but I think how they handle this whole Rajan issue probably leaves bad test in the mouth.
Latha: Now that we have seen the early market jitters and probably the smoothening of those jitters, wanted to continue this medium-term discussion. We were discussing legacies, I wrote that piece in Mint and in Moneycontrol about Rajan's legacies being mainly this inflation targeting and ensuring that India moves to a 4 percent inflation country. He didn’t quite get there in three years. Rakesh Jhunjhunwala was confident that that legacy will not be given up. The reasons for his exit were at least pointed to as a man who was coming in the way of growth by not cutting rates enough. Do you think first the legacy will be carried and will that be the big medium-term point to watch?
A: I am more concerned about two other factors. Inflation is always important and it is the central role for any central banker, my concerns are twin. I think Rajan's legacy is not going to be seen as much immediately the inflation targeting and having brought it down is important.
But I think the more important factors are the stability that he lent to the currency market particularly in the global context that he walked in and the sterling job that he has done with the banking system in forcing them to clean up or at least own up to the problems that they had on their books. Those are the two areas which are the most concerned about.
I did hear Rakesh Jhunjhunwala talking about the fact that we should not worry too much now because when Rajan took over, there was a crisis and that crisis has blown over. On the contrary, I would say that the world is facing unprecedented problems right now.
We may not have a crisis on our hand right now but just look at the world around us, look at what the Japanese Central Bank is doing to the yen, what the Chinese market or the Chinese government might have to do with their currency and what the Fed is about to do next.
I would suggest that we have not had these kind of expected uncertainty in the global currency markets ever in our lifetimes at least in foreseeable or in recent memory. That is the time when you need somebody with the global pedigree. I have seen the list of people who have put out their all eminent people but which of these people had the kind of pedigree that Rajan came with from a global perspective.
Look at his backdrop which is why he was able to understand and grapple with the global currency issues and address them so manfully. I don’t think a public sector banker or an academic, no disrespect to them, they are all great individuals, do they come with the kind of experience that Rajan came with and I think the answer would probably no, a bureaucrat, a public sector banker, an economist, they are good but I don’t think they are good for the job right now. Right now with what the world is facing, you needed a Rajan for the next couple of years to tide us through this phase and that worries me quite a bit.
The second bit is will a public sector banker or a bureaucrat with linkages to New Delhi be able to carry on with the same firmness that Rajan dealt with many of the errant bankers and a lot of the lenders who were not paying up? I think that is why the market has been able to claw back to 8,000, the kind of job that Rajan has done with the banks, which has shown up in the Bank Nifty.
Without that, this market could not have rallied 10-15-20 percent. My biggest worries are, with the banking system and whether his legacy as you put it, will continue and whether the next person is as capable or will be as capable of handling the global currency issues that we are about to face in the next one-two years.
Sonia: Will this move prevent FIIs from putting in fresh money into the market? Will the sentiment get hurt a lot because 10 out of 10 FIIs that we have spoken to in the past said the reason for investing into India or India being such a big overweight is the combination of the government and the governor. Do you think that fresh money could sort of slowdown?
A: It is difficult to say. I don’t see contrary to the belief this morning that we will see buckets of selling from FIIs. That is now how it works. You don’t wake up in the morning and say, I am so disappointed that the Rajan has left, let me sell off HDFC Bank, Reliance, Larsen and Toubro (L&T) because I have lost faith in the India story.
To take that step is very extreme one. If at all these things play out over the medium-term, you will have a new governor, maybe he or she will do something which people will consider maybe not as efficient as what the previous governor was doing, maybe the currency will take a knock or two and then people might say this is not seeming like the solid India that it was feeling like a couple of years back. So, if that happens maybe there will be a few knock-down effects.
So today's knee-jerk if it happens, I think will be quite minor. So you cannot correlate into a one-to-one, Rajan gone, therefore FIIs selling will start today. As I said earlier, FIIs selling or buying will depend largely on how the global factors play out over the next few weeks. In fact, this week I wouldn’t be surprised if there is a rally. The monsoon probably after a delay might restart and if the polls are right, Brexit might not happen and before you know it, you are talking about a fall because of Rajan, you could be back at 8,300 Nifty. I don’t think there will be a 10 percent rally as I heard some people say or write but you could certainly get back to 8,300-8,400 Nifty if these two events pan out in your favour.
So near-term events are difficult to call and I think they will be governed more by what happens globally this week and of course with the monsoon locally more than what has happened with the RBI governor's appointment.
Latha: So for the medium-term what would you worry as the areas? The biggest money that came to India from 2014 with Rajan and Modi in was in debt not in bonds and we were just running those numbers earlier in the morning. The amount of money that came into the debt markets was about 2.5 times the amount of money that came into equity markets. Is that the money that you would worry about? Is that investments in banks that you would worry about? What would you watch out for? You have spoken as a citizen, as an investor, as a market watcher, which are the troubled spots that we should keep on our radar?
A: My key source of worry has been one for the last many months and weeks consistently and that is global. I think the India piece -- as I was telling you last time we spoke -- is slowly coming into place. Earnings first time in many quarters have been good, you have clearly seen some of the indicators pick up, monsoons might be good. So the India piece is looking much better than it was looking even a few months back and that is the reason why the market is finding a lot of support.
I think if the market has to rally from hereon, if global markets permit, you will find that the Bank Nifty will lead it from hereon because without them, markets will find it difficult to go up. Some of the monsoon related plays etc, the local consumption plays will also rally but they are not big enough to drive the market beyond this 8,300-8,400 hump. That is the hump I am a little worried about, not technically, I don’t understand technicals but I think beyond that the market starts to look a little expensive in the near-term.
It will get to 9,000 at some point but if you are saying that if Brexit is out of the way, will the market dart to 8,800-9,000? Anything can happen but if it does, it will be ahead of itself because the valuations will look very stretched. We need some time out here to wade through these global problems but just to get back to the discussion that we were hearing earlier for just half a minute on whether individuals don’t matter and institutions do, taking on from Rakesh Jhunjhunwala's point, I will ask anybody with that point of view that simple question. If today you say, Narendra Modi is not Prime Minister from a global investors' point of view and you replace him with any man in that party, would the view on India be the same? You can say that, why is there nobody else capable in India in running the country, like you are saying, there may be many people capable of running the Reserve Bank of India. So is the individual not important? If Rajnath Singh is Prime Minister tomorrow, would an investor feel as bullish about India or would he not?
So these things are nuanced, depending on how you want to position some kind of nuance because of the market you can make a point but I think you cannot get away from the fact that some of these individuals have played a big role in determining the India perception right now as it stands and you cannot dismiss that.The Great Diwali Discount!
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First Published on Jun 20, 2016 09:57 am