- Naval Bir Kumar, managing director at IDFC Mutual Fund told NDTV Profit that the UP election results will have short term yet sentimental impact on the market.
Naval Bir Kumar, managing director at IDFC Mutual Fund told NDTV Profit that the Uttar Pradesh election results will have short term yet sentimental impact on the market.
He believes that the policy paralysis of Indian economy is likely to end soon.
“The RBI has been hoping for the government to improve the fiscal situation. The central bank will cut not rates in mid-March, but in April,” he said.
Below is the interview. Also watch accompanying video.
- How important are these results tomorrow?
- Not at all. The election results clearly have a sentimental but a short term impact on the markets. It was expected that Uttar Pradesh elections would strengthen the UPA. We would get much more policy action, which will start benefiting fundamentals or any economic development. In my view, politics is divorced from economics but it still has some impact.
- Last year was all about the political economy…
- Yes, the election does impact the economy, especially the Indian economy through policy. And policy in India is exceedingly slow. If you get a policy framework changed, then it has a larger impact on the economy. But a lot of things happen behind the scenes in the Indian economy. So, how these political results share the economy becomes important.
- But a lot of people have said that election results will impact markets significantly. (Do) You belong to the minority?
- Well, the markets were up in the beginning of the year because of the FII money that came in and that was prompted by three factors. One was the excess liquidity created by the longer-term refinancing operations (LTRO). Second was very cheap rupee and third was a very cheap equity market. So, if we get our policy framework right then the fundamentals in the economy may improve. But given the fact that the investment economy has no legs left and since income is slowing, only the FII flows can boost the markets.
- How are the markets going to react?
- We have got a very high current account deficit, fiscal deficit and persistent inflation. So consumption boom would allow us to import a lot but since we haven’t created an infrastructure framework, it is not allowing us to export the goods. So if the economy does well, our current account deficit will collapse. Hence, you get a currency shock in the system, which hampers growth. So, right now we are going through one of those periods of shocks. However, we have got very unfavorable economic trends ahead of us. So this kind of a slowing economy is not going to give you any growth impetus. There are lots of economic headwinds still facing the economy. I’m Not seeing bold policy decision making given the fact we have elections in 2014.
- What will be the reaction of the market?
- Tomorrow is going to be a big day for markets. Markets can either go up or down. Whichever way the markets go, in the next 2-3 days, they will trade the opposite way. However, flows are going to be the big driver. If the flows turn negative and the rupee continues to depreciate then the trend for this week is negative.
- What’s the impact of the election outcome on the RBI policy and Union Budget?
- The RBI is been looking towards the government to improve the fiscal situation before they start planning any cuts on interest rates. I don’t believe that the RBI will cut rates in mid-March. In fact, it will start cutting rates from April because it is not only about what it is in the budget but how credible it is and one would like to see what it does to price actions. Food inflation has come off a bit but manufacturing inflation is still holding up. Even the RBI governor is concerned on the fiscal situation of the economy.