De­mand Re­vival Key to Strong Earn­ings Growth

The Economic Times - - Money -

In­vestors are dis­count­ing a quar­ter point in­ter­est rate cut from the Re­serve Bank of In­dia on Tues­day. S Gopalakr­ish­nan, chief in­vest­ment of­fi­cer at ICICI Lom­bard, tells Shilpy Sinha that there is room to dou­ble that given the slow growth and the need to re­vive the bank­ing sec­tor suf­fer­ing due to stressed as­sets. Edited ex­cerpts:

All eyes are on RBI Gover­nor Raghu­ram Ra­jan on in­ter­est rates. What’s your ex­pec­ta­tion? Mar­kets are dis­count­ing a 25 ba­sis points cut. One can ar­gue for a sur­prise for more. There is room for 50 ba­sis points (rate cut) given the slow growth and stressed as­sets in the bank­ing sec­tor. The other point is if you cut 50 ba­sis points, ex­pec­ta­tions will get over. The third is if RBI cuts by 25 ba­sis points and the pol­icy stance is ac­com­moda­tive, I think it will be any­where be­tween 25-50 ba­sis points. Within Asia, we have the highest in­fla­tion. It is a ques­tion of what is the pri­or­ity — do you want growth with­out be­ing mind­ful of in­fla­tion? We are cor­rect­ing. Fi­nan­cial sav­ings have come down to 6% of the GDP. If it is not giv­ing real re­turn, why will peo­ple put their money in fi­nan­cial as­sets. They will rather buy gold or phys­i­cal as­sets. That has been the trend so far. When­ever in­fla­tion is high peo­ple have gone for gold or phys­i­cal as­sets. Now, we need to

strengthen our fi­nan­cial sav­ings.

The mar­ket has ral­lied af­ter the re­cent Fed state­ment. Has the threat from the US rate hike has re­ceded? In the re­cent past, we saw mar­kets re­act­ing to the re­ported core in­fla­tion num­ber of 2.2%, we saw the dol­lar weak­en­ing and com­modi­ties ral­ly­ing. I am sure (Fed chief Janet) Yellen knows the un­der­ly­ing eco­nomic con­di­tions bet­ter than we all know. The is­sue is that one does not want dol­lar to ap­pre­ci­ate much, nor an as­set price bub­ble, nor de­fla­tion and re­turn of pes­simism ei­ther. So, it is a del­i­cate bal­anc­ing act which is be­ing done. Our as­sump­tion is that there will be no rate hike for the rest of the year.


What does it mean for fixed in­come se­cu­ri­ties? If the stance is pos­i­tive, the 10-year G-sec can come to around 7.35%. Mar­kets will fol­low how in­fla­tion moves and how global fac­tors pan out. The over­all spread has al­ways been be­tween 4.5-4.8%. Now, we are sit­ting be­tween 5.8-6%. There is a huge gap. If you look at US rates and our rates, there is a huge dif­fer­ence. If you look at most de­vel­oped mar­kets they are ex­pe­ri­enc­ing de­fla­tion. The only risk to the whole in­ter­est rate cy­cle is the fear that mone­tary pol­icy has done its bit and the only way to boost econ­omy is fis­cal. What has hap­pened in dol­lar mar­ket is a bal­ance sheet is­sue and that over­lever­ag­ing has to come down.

Oil has been a sav­ing grace for In­dia. But it has ral­lied re­cently. Is that a cause of worry? The re­cent spike in the com­mod­ity is not fun­da­men­tally driven. It may again cor­rect back. Com­pa­nies are not sure of where this com­mod­ity cor­rec­tion will set­tle.

Cor­po­rate earn­ings have been a drag for In­dia. Does that change in the new fis­cal year? You have to look at how nom­i­nal GDP per­forms. A lot of com­pa­nies did not pass on ben­e­fit of lower costs. If the de­mand strongly re­vives, we will see a strong cor­po­rate earn­ings growth. Oth­er­wise, it will be a re­peat of 2015-16. Best case sce­nario is low growth in the range of 8%-10%.

There is a com­plaint about over­all eco­nomic growth? Is there a scope for ac­cel­er­a­tion? Growth will come from capex in­vest­ment from gov­ern­ment and a lot of FDI is com­ing into In­dia. We are on a slow re­cov­ery path. We are clearly see­ing a slow cor­rec­tion in num­bers. The GDP growth could be 7.5-8%, largely driven by do­mes­tic con­sump­tion. FDI flows should be more than FII flows. We don’t see ex­ports re­cov­er­ing. The de­mand has to come from do­mes­tic con­sumers. Ru­ral de­mand should come back. We had two bad mon­soons. This year should be (one with) a nor­mal mon­soon. For pri­vate sec­tor, as long as they don’t see po­ten­tial de­mand, they won’t come in.

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