Will elections change the direction of the market?
More important thing is the outcome of the election. If we have a stable government, whether it is BJP led NDA government or Congress led UPA I think the outcome is pretty same. The market reaction will be wary on the day of the result but later on people will not care much. I don't see much difference between economic policies of two coalitions.
Has the risk of weak coalition risen with AAP?
I don't think so. Even before AAP fragmentation in Indian politics was very high. BJP does not have very strong presence in South and East India. There are about 220 seats in four southern states, east Orissa and West Bengal. And BJP currently has about 25 seats in these states and out of that 18 come from Karnataka. Unless BJP does extremely well in north, west and central parts it could be tricky for the party to form government. If we look at Congress, given the fact they are definitely going to loose some seats in MP, Rajasthan, Andhra Pradesh and also UP. The 206 seats which it has in Parliament now may also come off significantly. So there is a chance that neither of these parties may be in a position to form government.
Will cyclicals have a better year than exporters?
We have elections in the middle of the year; depending on that second half story will play out. So if you have a stable government maybe the domestic cyclicals - auto banks etc. - will do well in that case. If we have a very unstable government of small regional parties then these sectors will collapse. It's very hard to forecast what is going to happen.
What is your view on the market in the near term?
In short term, you will have to look at the trajectory of inflation and consequent RBI action. Other than that, the third quarter results will give some indication whether you are seeing any improvement in operating environment of companies.
There is not much stuff to look forward in markets at this point of time. We will have to wait and see what comes out of election.
Everything will be on hold mode time till the India discovers what lies in store for us as far as new government is concerned and subsequent to that what are the economic policies.
Inflation has surprised positively?
You have seen that a couple of positive data points, but keep in mind that we have also seen a minor uptake in core inflation.
However, it is not anything significant that will force RBI to look at rate hike. But a rate cut looks extremely difficult given that headline inflation is very high. As far as earnings are concerned, so far, results have been okay and surprisingly little bit on the upside. It has been a norm for some quarters that good companies report earlier and bad companies report later and disappoint. The important variable is elections. As long as we have a favourable outcome in form of stable government there will be lot more excitement in markets.
What will RBI do? Will rates come down?
The headline inflation has come down pretty sharply. If you look at CPI it's down about 120 basis points, WPI is down about 140 basis points, so that is meeting at least one criteria of the RBI's two criteria. Core inflation has gone up but it has inched up very marginally. So I think this time RBI will just hold and wait for subsequent data points to see if any further action is warranted.
My sense is interest rate tightening, if it happens, will happen only in the March policy meeting not before it. And I am not very sure it's going to help at all, so RBI should leave the rates just as they are for some time. Obviously, we will have to wait and see outcome of elections and subsequent movements on fiscal policy. May be that is when you will see RBI in a better position to take some action. November onwards the inflation numbers will start coming down pretty significantly and then there might be some room for rate cut.
Is inflation the most important factor for markets?
Inflation will any way come off because of the base affect. Inflation is a variable that reflects other things in the economy, so inflation is more an outcome. So if you see better governance, improved fiscal position then anyway inflation will move down. So is imperative that government starts putting fiscal house in order.
Has the recent government actions helped?
In the last fifteen months the government has done the right things. Many of the actions taken by government are work in progress. Recent measures are arrangements to ensure that fiscal deficit remains at a certain level which is stated target of 4.8 per cent of the finance ministry. Some of the things could have been done a lot earlier.
What do you have to say about Coal India disinvestment?
They should have done it a long time back. Coal India is sitting on about Rs 62,000 crore of cash and generating much higher amount of free cash flow every year. So, whatever capex plans it has...it is generating several times more cash flow. So Coal India does not needs that cash...so it should be given to shareholders which include Government of India. It's the right strategy to do.
What about coal block cancellations?
We have a process which was very suspect to start with, the best way is to scarp it and start anew. We saw the same thing happening in the case of 2g spectrum. Now that we have fairly well established process for auctioning the national resources, the right way would be to put the same blocks on auction again.
Once they pay the right economic price for any asset then you will see companies behaving in the right way.
What is your view about the spectrum auction?
The market has got little bit rattled by the fact that Reliance Jio is also going to participate in the 900 and 1800 MHz spectrum auction. I suspect that they are not going to take part in 900 MHz, it makes no sense as it is more involved in 4G for which 1800 MHz makes more sense. If that is the case markets should not be worried about incumbents having to pay very high price to retain their spectrum in three circles of Delhi, Mumbai and Kolkata. The concern is that Reliance may play spoilsport by building aggressively in both 900 and 1800 MHz, which could force incumbents to match the price or pay very high price for retaining the spectrum.