Mirae Asset expects RBI to cut CRR & repo on June 18

As India is battling macro woes of low GDP, increasing inflation and tight liquidity system, all eyes are now on the Reserve Bank of India's (RBI) credit policy review scheduled on June 18.

Like most economists Rahul Chadha, Mirae Asset Global Investments too is hoping that the central bank will cut cash reserve ratio (CRR) and repo rate in the next policy rate.
In an interview to CNBC-TV18 he said, "I think we will get a repo and CRR cut because liquidity is little bit tight in the system. Outside that RBI may continue its stance that it watches out for inflation and currently concerns over growth are more than inflation. But should inflation concerns arise again the Central bank would put the rate cuts on hold."
 
In its annual credit policy for 2012-13 on April 17, the RBI had slashed short-term lending rate or repo rate by 0.50% to 8% to boost the economy. As India’s Q4 FY12 GDP fell to a drastic low, most economists pointed out that a tight liquidity situation created by RBI’s policy stance as one of the major factor. Hence, it is expected that the central bank will focus on growth this time and not much on inflation. Also read: Lower crude price presents elbow room to cut rates says Gokarn
However, Chadha quickly points out that RBI will watch out behaviour of the currency as well and if there is a draw down in the reserves or kind of the currency depreciating, then the rate cut may be put on hold.
Shifting focus on investment strategies, Chadha is betting on consumers and pharmaceuticals which are defensives. He is underweight oil and gas because he believes that there is such lower capacity in the system. "We did rather use that to have an exposure to financials which are a good way to play the beta and the recovery in the economy," he adds. Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more. Q: We have had a rough month go by and this one is really stacked up in terms of potential cues - global and local. How do you think the market will come out of June?
A: I think there are a lot of events scheduled for June. We have got Greece elections which come around mid-June. Then over the next two-three weeks, we would like to see some clarity on what happens on the recapitalisation of the Spanish banks, whether the Germans agree to that or not. So these are two single big events.
Outside that, the trend in commodities is quite positive for India. We have seen a nearly 20% correction in crude which will lead to a much lower print for inflation and hopefully we can see a cut in interest rates in mid-June when the RBI meets. Q: Crude has corrected a whole lot but the market has not really taken that into their stride. Do you see the market getting relief because of crude or will it be just back to tracking policy action etc?
A: If you see after the sharp correction in crude, the rupee stopped depreciating. The rupee depreciated initially because India had one of the worst current account deficits amongst all countries in the region and after the sharp fall in commodities, the rupee stopped depreciating. Indian markets have stopped underperforming the region. But again from hereon we need more policy action in terms of interest rate cuts, more positive response from the government in terms of tackling fiscal deficits and creating a positive investment climate in the economy. Q: There is certain bipolarity in opinion right now, one that suggests there may be a big gush of liquidity coming courtesy any kind of QE and the other that June may finally be the month where we begin to see sharp outflows especially for a market like India. Are any kind of capitulation or big pullout?
A: From what we have seen now with commodities correcting, I doubt whether FIIs would really exit India because India's weight in the MSCI APAC index is 7-8% and if you see what is happening in the rest of the regional markets, most FIIs are about 9-10% weight and that is a fair weight for a structural story like India.
Should one had seen these commodities continuing at higher prices like before and the current account worsening and government not acting, we would have seen FII capitulation but with the growth story taking a knock elsewhere in the region, I think FIIs will be far more patient with India provided the government continues on the reform track. Q: What could the downside risk be for the market for the rest of the year? Do you have a year-end Sensex target that you would like to talk about?
A: It’s difficult to give a number at this point of time because clearly there are too many moving punts globally but if you take a two-way time perspective with the rupee at 55 to the dollar, the risk-reward clearly looks positive. It’s a general belief that when things come to a halt, we see policy making being more proactive in India and currency is clearly something which moves policy makers. At 55 - 56 to the dollar, we believe that the much needed tough reforms will be taken to put the economy back on the growth path. Q: How much is riding on monetary policy? What is it that you think the market will see from the RBI later this month?
A: I think we will get a rate cut and CRR cut also because liquidity is a bit tight in the system. But outside that, the RBI may continue its stance that it watches out for inflation and currently concerns over growth are more than inflation. But should inflation concerns arise again, the central bank would put the rate cuts on hold. The other thing which the central bank would watch for is the behavior of the currency. So if we see a draw down in the reserves or the currency depreciating, then the rate cut may be put on hold.
_PAGEBREAK_ Q: How do you approach this infrastructure space which has seen the greatest price damage?
A: I think the leading players are still attractive from a medium-term perspective and on every decline we would like to add them but a better proxy would be again financials. You have got NBFCs which are indulged in infrastructure mending, which are far cleaner, much better managed entities, so one like to take exposure over there Q: What are your thoughts within financials? Do you prefer PSU banks or private banks?
A: The large overweight is for private sector banks, though we have also increased our exposure to the largest public sector bank because clearly NPA incidents were first reflected in that bank. We have probably seen the peak of NPAs and we saw the fourth quarter, the bank are priced in terms of net NPAs and we expect the trend to continue.
So I think public sector exposure would still be limited. We would like to play the initial part of the recovery through private sector banks and as we get more confidence on the government's ability to control fiscal deficits and do the right things to encourage investment in the economy, we will build more exposure towards public sector banks. Q: Another trend that we are noticing is that a lot of these high valued consumer or FMCG names are loosing flavor now - stocks like HUL, ITC or even Jubilant. How would you approach this space?
A: Clearly, some of the names that you mentioned, valuations are running at about 35 times forward earnings. So this 35 can very well correct to 25 times if we have two quarters of disappointment. But if you look at the big largecap consumer names, they are fairly reasonably valued anywhere between 25 times earnings. So we would not see a PE expansion there but they are at least assuring you of a 10-15% return a year from now. Q: One of the biggest disappointments in the earnings season was Tata Motors. What do you do with the auto space now? Would you still buy anything from there?
A: We still continue to like the two-wheeler space. Apart from that we have also added the leading car manufacturer on declines because looking at the long-term potential, valuations look reasonable now. Q: Do you think it is good to get into some of these risky high beta names or do you think it is still best to hide in consumer stocks?
A: The way we are playing this in our portfolio is consumers and pharmaceuticals which are defensives they make a core part of the portfolio and we remain underweight oil & gas because we are negative on petrochemicals and refining where we believe there is lower capacity in the system. We did rather use that to have exposure to financials which are a good way to play the beta and the recovery in the economy.