Markets looking for cues from RBI policy, Budget: Nirmal Jain, IIFL
We should look out for fiscal deficit, the underlying assumptions of which should be realistic and whether the government can muster some courage to control subsidies.
ET Now: What do you make of the cautious mood in the markets post the outcome of the UP polls and how serious are the concerns of reforms stalling from here onwards?
Nirmal Jain: In fact, the market has been a bit disappointed because most people were expecting the Congress to do much better and then if, say, the SP government in UP were dependent on Congress support, then they could have bargained their support at the Centre and probably would not have been as much dependent on Mamata support, who has been very difficult to handle in terms of reform process.
But there are two schools of thoughts here. One is that Akhilesh and Mulayam have also won the elections based on development plank. So, there may be a lesson or a message for the government that now the growth and development agenda is more important because people are looking at means of employment rather than just subsidies, grants or some money which is just given away.
So, there is a view that now that government has realised that they did everything possible in populous in terms of NREGA, they talked about, food security, those things have not worked. So, they might get back on development and growth track which may be positive, but the market correction is also for few more reasons which is if you see globally also markets have been correcting and obviously they are not impacted by Indian political conditions. But after that last bailout of Greece, there has not been any further news for the markets to sustain rally. So the markets have been lacklustre and they have been correcting in Europe and other markets as well.
So, it is a global trend and India has been part of that. But other than that, the market will now look forward to RBI’s credit policy on the 15th of this month and then the budget on 16th. FII investors are looking very curiously now that whether the Congress will now succumb to more populist pressures or they will do something more pragmatic, more growth oriented and take some decisive measures to bring fiscal deficit under control.
ET Now: At these levels, what exactly are markets pricing in from the credit policy? Do you think the possibility of a CRR cut and a rate cut, it is already built in, baked in?
Nirmal Jain: I would say 50:50 because while the liquidity position has been set, most people believe RBI will at least do a CRR cut which is more likely. At least there is 70-75% probability that CRR cut will happen, but probably maybe 50% of the market would have taken the cut already and that is very likely. The indications towards rate cuts, say even if that happens in April, will help the market a lot.
Now that growth numbers have been very bad because GDP growth has been 6% odd in the last quarter, which has been a bit of unpleasant surprise because government people and policymakers are still expecting maybe 7 or near 7% growth, but that has not happened. There is a tremendous pressure on the central bank also to make sure that they do not do something which hurts growth further.
Of course, inflation is there as their key agenda, but if inflation is caused by factors beyond the control of monetary policy, then at least they will look at growth. So, CRR cut is a good probability. My personal opinion it is quite likely to happen, but whether the market has factored in or not, again it is a probability.
ET Now: What according to you are the critical factors that you would watch out for in the upcoming budget?
Nirmal Jain: In the upcoming budget, we are watching out for fiscal deficit numbers and the underlying assumptions because optically somebody can say that fiscal deficit is under control and you can have presumptions of about tax revenue or expenditure which are unrealistic or even for disinvestment. Then obviously the Indian or the foreign institutional investors or who have analysts and fund managers who are very well qualified and experienced, they will see through it.
So, in the budget we should look out for fiscal deficit, the underlying assumptions which should be realistic and whether the government can muster some courage to control subsidies, particularly say urea subsidy or even diesel and other things and whether they will keep their populist expenditure of NREGA and these other measures under control, and can take some decisive steps to control subsidy? That is what investors and the markets are looking forward to.
ET Now: So, which large cap stocks to your mind now officially qualify as buy on every dip?
Nirmal Jain: No, as I said, select stocks in telecom, IT, banks, pharma and FMCG like ITC, Sun Pharma, etc, look good.
ET Now: The fact that crude prices are refusing to come down even though global demand is strong, do you think that is the big irritant and on paper if crude trades above $115 or $120 per barrel, it is impossible to make a bull market case.
Nirmal Jain: No, it is a matter of great concern because India’s most of the problems are linked to crude oil. It is the largest item on our import bill and fairly inelastic in demand and so it basically impacts our current account deficit, it also impacts our fiscal account deficit because a significant part of price increase the government has to take the burden as subsidy and they are not able to pass it onto the consumers.
So, crude oil is a very serious problem if the prices remain high, but I am an optimist because we have seen that China growth is slowing down. First time in recent past China has forecasted 7.5% growth which is much lower than their double digit growth that what they have experienced in last 2 decades. Developed market growth is coming down. So crude oil prices logically should not remain at very high levels. There are issues with Iran and some geopolitical problems, but they may get over. So, as we get into the second half of the year, probably things will ease, but from India’s fiscal macro point of view, that is most serious concern. It is the concern No. 1.
ET Now: So any themes or stocks you would keep on your radar from the budget expectation point of view wherein the outcome could be favourable?
Nirmal Jain: No, one should look at the corporate tax excise duty and companies that will be directly impacted. If there is any change in corporate tax, then obviously high tax paying companies like FMCG and others will be impacted.