‘Large-caps might see a correction for a while to digest recent gains’

TIRTHANKAR PATNAIK, the India Strategist at Mizuho Bank, says one overhang on the markets would be the supply of equity in the form of initial public offers (IPOs), qualified institutional placements (QIPs), and other capital raises lined up for the year. Edited excerpts of a talk with Puneet Wadhwa: state government bonds or state development loans. While the overall loan amount will not impact the fiscal deficit much, it will start showing up in bond yields. More paper will have a negative impact on yields at a time when RBI, in our view, is likely to cut interest rates.

For banks, it will be a moral hazard, as anyone with agricultural loans will start to worry. We have seen this earlier, when the United Progressive Alliance government announced farm loan waivers. We have documented cases where farmers who had the capability to repay had also applied for a waiver. Though banks will get their dues, there will be near-term stress. How convincing was the recent macro economic data? When do you expect a rate cut? Gross domestic product and index of industrial production (IIP) data, along with the later data on CPI (consumer price index) inflation, point to a weakly improving macro environment, which had a minicorrection in the first quarter of FY17 that intensified after demonetisation in November.

Inflation dynamics seem to have a taken a definite turn due south, driven by the sharp drop in food inflation, which was highlighted in the (Reserve Bank's) Credit Policy and corroborated further with inflation data for May. The most striking aspect of the policy document is its sharp downward revision of the perceived inflation trajectory in FY18. While the policy avoids an abrupt change in stance (back to being dovish and accommodative, from the current hawkish and neutral), only in the guise of a wait-and-watch attitude until the current scenario plays out, we maintain expectations of further easing in FY18, led by a 25 basis point cut in August. Have you made changes to corporate earnings estimates for FY18, given the coming GST implementation? March quarter earnings were above expectations overall but led by a handful of (cyclical) stocks, with Nifty profit after tax growth at 15 per cent, an 11-quarter high but not enough to raise our estimates, given the low FY17 earnings growth of around 1.5 per cent. We maintain estimates of 20 per cent in FY18 and 16 per cent in FY19.