Predicting is a pastime for many. Instead of predicting where the markets will be in 2014 or how the markets will fare, Ritesh Jain, the CIO of Tata Mutual Fund shares his views on the RBI policy on interest rates, the imminent US tapering, the turn around of economic indicators like the CAD, GDP and non-food inflation, and in an election year, what the markets hope from the poll outcome.
What is your view on interest rates?
It seems unlikely that the RBI has taken a softened stand on inflation and, if warranted, will increase rates, including on off-policy dates if inflation remains stubbornly high. The rate hold has given positive signals to industry that RBI has an eye on growth while it also provides the central bank additional time to assess the effect of Fed tapering on rupee. However, we believe that the RBI will be comfortable with a $10 billion taper and the rate movement will be largely determined by inflation rather than FED tapering. We believe that positive real interest rates is what the central bank would want to target to rein in inflation and prop up savings.
Recent economic data like the GDP, CAD, non-food inflation and capex indicates we are at the bottom, what is your view?
That latest data suggests that the worst might be over and economic recovery could be in sight. However, we believe that it is too early to draw a conclusion. GDP growth in the April-June quarter, although higher than Q1, was not broad-based with services and industries growth falling way below expectations. Also while CAD has been decreasing sequentially, the major driver for this growth has been lower gold imports as well as declining capital goods imports given the weak capex.
While inflation is expected to moderate marginally in the near term driven by lower food inflation, a weaker rupee coupled with shocks in crude prices could more than offset this. Capex indicators suggest no major up-tick in capex activity with private projects under implementation on a declining trend. CV sales declined 30% y-o-y in Q3 FY14 exhibiting among the worst performance in the last 5 years. We believe that growth will lag at low levels in the next 3-4 quarters as the government focuses on containing CAD and inflation while containing the credit-deposit ratio which has spiked in the last 6 months.
What kind of effect will tapering have on India?
While the immediate impact of tapering has been minimal, the longer term impact will, to depend on the intensity and acceleration of the tapering action. We are better prepared for FED tapering this time around; the concessional dollar swap window has earned $34 billion of FCNR (B) deposits and the central bank is making the right kind of noises in communication with the market on FED tapering. However, if the tapering turns aggressive, riding on faster than expected US economy recovery, it could trigger a rupee sell off which could have a de-stabilizing effect on the rupee.
What is your expectation from the general election results on the markets?
There is a lot of general optimism with regard to economic recovery and policy actions. While the outcome of the general elections remains to be seen, we believe that a stable government will be a key to economic growth. A lot of infrastructure projects have been on hold, awaiting environmental clearances and land acquisition related issues; more pro-active environmental clearances would help industrial growth and pave way for clearing supply side bottlenecks.
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