Taper not a worry as RBI better prepared: Pramerica MF

Ahead of the US Federal Reserve meet this week, market is wary about the uncertainty around pulling back of the monetary stimulus by the US central bank.

However, BP Singh, Equity Pramerica Mutual Fund believes the Indian market is better prepared now than it was during June-July.

In an interview to CNBC-TV18, Singh says the Reserve Bank of India is now better prepared to face tapering, there is much higher forex reserve and the currency and interest rates are much higher now. 

Also Read: Need right sentiments to push rupee to 55/$: India Ratings

Singh is bullish on pharma space and GlaxoSmithKline (GSK) increasing its stake in the Indian arm shows confidence towards the sector. He, however believes that the worse is yet to come for banks. Below is the verbatim transcript of  BP Singh’s interview on CNBC-TV18 Q: Are you smelling that the high for this year is over, that things are beginning to look wobbly, will this taper fear become a taper terror?
A: No, we are not so scared of the taper fear. In fact now we have hit the bottom as far as economy is concerned and from hereon you will see a U-shaped recovery.
Generally, market runs ahead of the expectations and that is why in the last two months we started assuming everything positive. So now sanity is coming back, things are stabilising.
We will not have problems similar to what we faced in June and July when the taper talk came last time. This is because this time the central bank is better prepared, we have a much higher forex reserve, we are taking better care of currency and interest rates are higher.
Also, the currency is at least Rs 8 more depreciated than what it was at that time and so, taper is not an issue. But when economic turnaround takes place, there will be difficulties. In the next three-five quarters, we will face those kind of difficulties.
Market is not ready to accept the fact that whenever turnaround takes place, there are companies that are going to be winners but there are companies that are going to be losers as well. And the losers are obviously companies that disappoint and market at this point in time is just assuming all winners, but that is not what is going to take place going forward. Q: What are your views on the GlaxoSmithKline (GSK) open offer for its Indian subsidiary, GlaxoSmithKline Pharmaceuticals, and we are seeing many MNCs do that with their Indian subsidiary specifically in the pharma space. How would you approach that entire space now?
A: We are quite bullish on pharma but we take it in slightly different way. We think that any parent or any share holder will like to have a higher stake as long business is strong, as long as market is good and so, will continue to focus on stronger businesses, good companies, the parents whether they are the owners in this case or the minority share holders, they will all run after it. Therefore, one must not start speculating too much about parent increasing their stake or not increasing their stake. It only shows the commitment and it also reflects that the entire market is strong.
If you look into the Indian pharmaceutical market it is one of the largest in terms of volume. Now, we have started accepting patent here and so more and more patented products will come in this particular market and gradually you will find that multinationals find it interesting.
Having a higher stake allows them to manage the situation much better as compared to too much openness that they have. So this kind of scenario is not surprising but at the same time we are not going to run after picking up companies speculating whether somebody will increase stake or not. We would rather focus on good businesses because if businesses are good, parents will obviously increase their stakes. Q: What is your expectation from the RBI policy later this week and how are you approaching some of the interest rate pockets like banks, autos?
A: We are already carrying underweight positions on these sectors because we were of the view that valuations were running ahead. Also, the fact that the economy though improving, will take some more time. As far as banks are concerned, the worst is yet to come.
When an economy that was growing at 8-9 percent slows down to the levels around 3-4 percent, you cannot wish it away that there will not be non-performing assets (NPAs) because all the investment decisions that we have taken when the growth rate was 8-9 percent and expectation was of double digit, all those investments actually become NPAs. Our banking system has not yet recognised them completely.
As far as RBI is concerned, looking at all the inflation data and all the facts, it needs to act to control the inflation but interest rate hike may not be something which will have the desired effect. This is because if you look into the banking system you will find that the deposit growth rates are higher than the credit growth rate. Also, the FCNR deposit that has come into the country has resulted in huge amount of liquidity with the banks and so, the rate hike may not be transmitted.
Now at this point in time one will have to ensure that the surplus liquidity which we have in the system needs to be controlled and that probably will have a much better desired effect on the inflation in comparison to the rate hike at this point in time. So not that I am saying that we don't need to increase the rate, we probably need to increase the rate at a much more slower pace but probably controlling liquidity at this point in time is much more desirable to control inflation.