Low In­ter­est Rates Can Ad­dress the NPA Is­sue

The Economic Times - - Money -

Raj Bhatt, CEO of Elara Cap­i­tal, the Lon­don­based in­vest­ment bank and bro­ker­age, be­lieves the fi­nan­cial en­vi­ron­ment is risk averse with large in­vestors chas­ing ‘re­turn of cap­i­tal’ rather than ‘re­turn on cap­i­tal.’ The risk-tak­ing abil­ity of large funds is low on fears of fi­nan­cial melt­down, mak­ing cap­i­tal pro­tec­tion a pri­or­ity over seek­ing re­turn on in­vest­ments. Yet, Bhatt says com­mod­ity and equity mar­kets may not see a Fe­bru­ary like crash. In an in­ter­view to Palak Shah, he talks about the cat­a­lysts and hur­dles for for­eign money flow into In­dia. Edited ex­cerpts:

Did the stock mar­kets see their worst in Fe­bru­ary or another sharp fall is ex­pected? Mar­kets may be range bound for some time. Although, global liq­uid­ity is high due to neg­a­tive or low in­ter­est rates, risk aver­sion too is ex­tra­or­di­nary high. In Europe you have bonds trad­ing at 8-10% in­ter­est and we call them junk. For in­stance, Vedanta has gone for its third buy­back of bonds and sig­nalled to mar­kets that they have cash but in­vestors are cau­tious in buy­ing com­pany’s equity. Large in­vestors are chas­ing ‘re­turn of cap­i­tal’ rather than ‘re­turn on cap­i­tal.’ Yet a sharper cut in global equity mar­kets may not hap­pen as bench­marks are not trad­ing much higher than the bot­tom they formed in Fe­bru­ary. When will for­eign money flow into In­dia im­prove? Emerg­ing mar­kets (EMs) are con­sid­ered risky bets cur­rently. Although an­tic­i­pa­tion of higher re­turn from In­dia has kept fund al­lo­ca­tion sub­stan­tial, a low free float of equity stock in In­dia’s mar­ket lim­its the op­por­tu­nity for FIIs here. Funds do not want to drive up val­u­a­tions. If you bring $10 bil­lion into In­dian eq­ui­ties, indices move up by 10% or more. Hence, FIIs are open to in­vest in di­vest­ment is­sues, IPOs or do block deals where risk of driv­ing prices higher does not ex­ist. Also, In­dian mar­kets are fairly val­ued and may not see re-rat­ing till the time earn­ings catch up. This would take a few quar­ters. Till then, higher fund flows can be ex­pected through pri­vate equity deals in un­listed com­pa­nies or project fi­nance, debt and FDI. Gi­ants like Ap­ple, Cater­pil­lar or In­tel could in­crease their al­lo­ca­tion to In­dia for set­ting up units. China ben­e­fited from these com­pa­nies but In­dia is (now be­ing) pre­ferred due to (Prime Min­is­ter Naren­dra) Modi’s pitch.

What are the other fac­tors FIIs are look­ing at in In­dia? In­dia’s bank NPAs (non-per­form­ing as­sets) are a ma­jor prob­lem. But keep­ing in­ter­est rates high is a big­ger prob­lem than NPAs. Low rates can ad­dress In­dia’s NPA is­sue. It could make projects stalled due to higher cost of cap­i­tal vi­able. Com­pa­nies like GMR, GVK or JP Group will find some ground to stand. In­fla­tion is not as a big is­sue that it is made out to be. Tech­nol­ogy dis­rup­tion has caused all the trou­ble, not ris­ing prices. In­ter­est rates in In­dia are high­est glob­ally. Smaller coun­tries although bat­tling in­fla­tion slashed in­ter­est rates dras­ti­cally to avoid de­faults. Even Pak­istan played it smart on this by sharp cut in rates in just few months.

What’s your out­look for crude oil and other com­modi­ties? Is Brexit a threat? Crude is near its bot­tom. Oil pro­duc- ing coun­tries can­not in­def­i­nitely run deficit. There is tremen­dous pres­sure on them to cut or freeze pro­duc­tion. His­toric data sug­gests that such low crude prices are un­sus­tain­able for long. Cur­rently, 96.5 mil­lion bar­rel per day is the global de­mand and pro­duc­tion is 95 mil­lion bar­rels. If each coun­try cuts pro­duc­tion by 5%, oil will rally. Even though no­body is cut­ting pro­duc­tion now it will hap­pen. Oil could be at $60-70 in few quar­ters. It would bring down re­demp­tion pres­sure on sov­er­eign wealth funds. Sim­i­larly, me­tal prices too have bot­tomed.

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