RBI may try to contain further rise of rupee

Public sector banks have neither been able to grow their loan book nor leverage the massive branch network and retail franchise in 2016-17. The prompt corrective action would help private banks, which could capture depositors of PSBs in the next few years, said Prateek Mahesh, chief investment officer at Shriram Life Insurance, in an interview with Falaknaaz Syed. Excerpts:

What will be the impact of GST on earnings of India Inc?
There would be some disruption in earnings in the short-term because of the inventory de-stocking cost that is compensation for continuity of sales and the anti-profiteering measures. But from a long-term standpoint it’s a win-win proposition. Productivity will rise with removal of domestic trade barriers; exports too will become competitive. The government will gain from higher tax collections. There would be a multiplier effect of the improving macro growth on the overall market but consumption-led sto­cks, the transport and logistic sector would be clear beneficiary of shift from the unorganised space to organised one.

What will be GST’s impact on inflation?
GST rates are non-inflationary, as they have been kept at similar levels to the current rates of excise duty and state-level VAT. Food and fuel, which form the major part of CPI inflation, have been kept out of the GST structure. So, the official inflation figures might not be impacted. In fact, RBI in its June 2017 monetary policy had revised retail inflation forecast downwardly from 5 per cent to 3.5-4.5 per cent for the second half of the year.
But from a consumer standpoint, cost may go up as services, which form nearly 50 per cent of the total consumption basket in the economy, GST rates have gone up by 3 per cent.

After the UP polls, the market has been rallying. Is it sustainable? How do you see the valuations now and where do you see the index in the next 12 months?
India deserves its rich valuation. There are not many markets that provide the kind of growth opportunities that India does for medium- to long-term. It’s for everybody to see that the government is intent at pushing reforms and improving the ease of doing business. To assign a number to the index is difficult. But I can say with utmost conviction that there are pockets in the market that can give double-digit returns in the next 12-18 months.

What kind of first quarter corporate earnings could be expected?
As I said earlier, GST implementation would disrupt the pace of growth in the first quarter corporate earnings as most companies would take margin hit of the inventory destocking. Export-oriented sectors may have margin pressures on back of strong rupee during the quarter too.

What is your outlook on foreign fund flows with the looming Fed hikes?
Despite the lack of pickup in wage growth and core inflation, the Fed may continue to hike rates. But that may not translate into foreign funds flowing out. In fact, the flows have been intact through the rate hike cycle because India stands out among global assets with positive long-term growth prospects.

MFs are showing strong inflo­ws. How have the flows in Ulips been for the life insurance firms?
SIPs have made a huge difference to MF flows. The number of SIPs has almost tripled in last 3 years and it shows in the flows with almost Rs 4,000-5,000 crore of funds flowing month after month through SIPs. I don’t have sight of Ulip flows for the industry for the current year. As far as we are concerned, we sell mostly traditional products and hence flows in Ulips have been insignificant.
There has been a sharp disinflation over the last 2 months. What do you expect RBI to do in August?
India’s inflation trajectory is pretty optimistic. I think the June CPI number may read below 2 per cent. Good monsoon, lower oil prices and subdued growth rate are other factors that may warrant a rate cut by 25-50 bps at the August meeting. Looking at RBIs focus on resolution of stressed assets, I would expect the transmission of rates to reduce stress on the balance-sheet of the interest sensitives and also boost demand.

What big themes are you betting on?
As a theme, we are betting on firmss that would gain by shift fr­om unorganised to organised spa­ce. Also, the ‘housing for all by 2022’ envisages around 20 million new houses at an investment of Rs 20,00,000 crore. It creates opportunities for firms involved in housing finance, cement, buil­d­ing materials, etc. Transmission of interest rates would also help. Purely from the valuations point of view, we are taking a contra call on the pharma sector, as the long-term fundamental drivers for the generic business remain intact.

What would be your stock picking strategy – bottom up or top down?
We follow the top-down ap­proach wherein we assess the overall ma­cro-economic scenario and identify the strongest sectors that are poised to do well. Then we pick the best stocks out of the already identified sectors for investing.

Serious steps are being taken to solve NPA problem. What’s your outlook on the banking sector?
The government and the RBI ha­ve taken steps in right direction for resolution of NPAs, but it’s a long drawn process. I think there is a compelling case of private ba­nks gaining market share at the expense of PSBs. RBI data shows PSBs didn’t see any growth in their loan book in 2016-17. There were restrictions on many banks to lend under the prompt corrective action framework, but we will have to agree that PSBs are not ab­le to leverage their massive large branch network and retail franchisee. Private banks will not be behind in catching up on depositors of PSBs in the next few years. So, we are positive on select private banks with extensive retail coverage.

Where do you see the rupee by the end of year?
Indian foreign exchange reserves are constantly growing and have reached more than $380 billion. In 2017, the reserves have grown by around $19 billion, indicating ri­sing foreign investor interest and stronger rupee. RBI may wa­nt to contain the rupee’s further rise and hence rate cut becomes imminent. I expect a mild depreciation and see the rupee in the range of 65-66 by the year-end.

What are the major global and local negatives that can weigh on the market?
The major global risks might co­me from the geo-political crisis involving S Arabia and Iran back­ed by the US and Russia, respectively, or any hasty decision from N Korea. On the local side, the bi­g­gest risk is the farm-loan waiver contagion. Loan wai­ver is not just an economic issue but a socio-economic problem. Apart from substantial outlays it also corrupts the credit discipline of loanees. If major agriculture st­a­t­es resort to waivers, the im­pact on consoli­d­a­t­ed fiscal def­i­c­it co­uld be 1-1.3 per cent of GDP.

Falaknaaz Syed