Do you expect foreign fund flows to India slow down because of rise in US yields? FIIs are always bullish on India from a long-term perspective. They now believe India’s reforms are getting executed effectively on the ground. Some fundamental measures, such as GST, the Insolvency & Bankruptcy Code and the Real Estate Regulatory Authority are effectively working and shown results. The National Company Law Tribunal has done a good job in a short span. FIIs are also betting on India’s corporate earnings growth. So, FIIs being overweight on India would continue and India could be one of their best destinations.
What’s your view on the Indian markets? Fall of 5-6% from the highs is not a correction or big worry. Time correction is good for the market. I don’t think any kind of bubble has built up in the equity market like in 2007. Things are getting better, especially for India. When we started 2017, the year was looking very bad because of Brexit, demonetization, US elections and GST. US interest rates were also firming up. But still, 2017 was the calmest year with the lowest volatility in all the assets classes from equities to bonds across the globe. Indian equities gave 28% return. The year 2018 is looking great from the overall perspective of economic growth. All economies are doing well. In India, corporate earnings are recovering. Market is a function of sentiment, earnings, liquidity and macros. I don’t think oil prices will go up further from the current levels. Macros and earnings are improving and there are no concerns on liquidity. Fundamentally, India is much better compared to many other emerging countries. In the short term, there will be high volatility as people will sit out due to global uncertainties, oil prices, fiscal deficit and government borrowings. Once earnings start recovering, market will come back on track.
Are you expecting a rate hike in the near future? I am not expecting any rate hikes in the near future unless inflation spikes. Basically, inflation is a function of three factors in India — food price, oil price and fiscal deficit. I am not worried about government fiscal deficit. I am not worried about oil prices and I don’t think food prices will go up from the current level unless there is a drought. Bond markets work on rate, liquidity and commentary. The flat rate will not calm bond market volatility. RBI should communicate more to the bond market and calm them down. Otherwise, even though RBI won’t hike rate, the bond market will be highly volatile.
Are you comfortable with the Indian macro numbers? If inflation is not going up from the current levels, we are comfortable with the macro numbers. This year, one good thing people are not discounting is the nominal GDP growth rate, which will be much higher than last year. Last year, nominal GDP was 9.5%. This year, if GDP is 7% and inflation is 5%, our nominal GDP would be 12%. Nominal GDP is the one which affects all of us. Salary, corporate earnings, industry sales are not adjusted for inflation. We live in the nominal world.
What are corporates’ reaction to the government’s new policies and its implementation? Corporates are happy with the government as it has introduced several good policies. The GST has helped them in many ways. The December quarter results are better than expected. Margins were expanded. Capacity utilization has gone up. Capex cycle will start in a few months’ time. It may not be through Greenfield route but from acquisition route initially. With this budget, consumption will get a strong boost. SMEs are doing well. There has been good jobs creation in last few years. However, I personally feel the government and RBI should use good and positive communication to calm people down rather than bring about more changes in fundamentals.
What are the near-term risks? Oil prices, inflation, monsoon and state elections are the few things one should watch out for this year. There is a lot of anxiety in the equity and bond markets. Investors should be careful and prepare for volatility and absorb it, and not panic.
FIIs were seen moving money from equities to debt in the second half of last year. What is your outlook for fixed income this year? Five-six months ago, there was a lot of expectation that interest rates will go down very sharply. As that expectation has faded now, bond market is no more attractive. The optimism has reduced after the Reserve Bank of India pulled out lot of money from the market.