ET NowIn a chat with ET Now, Manpreet Gill, StanChart, Head of FICC Strategy, shares his views on the Indian markets and the RBI policy. Excerpts:
ET Now: What has been your assessment of the RBI governor’s commentary this time around? Does it seem sure that we will see a rate cut around the Budget?
Manpreet Gill: The RBI’s commentary was largely along expected lines. Since we just had a rate cut, it would be almost too soon to have yet another one a couple of weeks later. But the tone and the messaging were fairly consistent. It was really about the incoming data, particularly if not just growth but also about how inflation pans out. It is prudent to see how the budget pans out because the fiscal side and what kind of consolidation and whether we see some of those deficits targets being maintained, that also would be quite key to whether the RBI continues down this path of rate cut. So we think there is room for them to ease more, but we think they are sensibly trying to say that it also depends on the data, which is important.
ET Now: How do you think the data will shape up and therefore what is the interest rate trajectory over the course of the next three to six months post-Budget? Do you think there is the possibility of at least 25 to 50 bps rate cut?
Manpreet Gill: In our view, the data is likely supportive of further rate cuts and the policy will be supportive of rate cuts. So another 50 bps does not look unreasonable. The key is two things – one is to ensure that there are no negative surprises on the inflation front, particularly from oil. Second is that policy reform continues down the reform path and the fiscal consolidation continues down maintaining sort of fiscal deficit within the target. As long as we do get both of those, which is our view, we think there is room for the RBI to cut rates because if you look at real rates or rates net of inflation, they have actually gone up quite a lot simply because of how much inflation has fallen. That by itself is room enough for the RBI to cut rates, a bit further.
ET Now: What is the sense that you are getting about oil markets because they seem to be on a rebound? While it is auguring well for the rest of the world, you cannot say the same about India.
Manpreet Gill: Oil is definitely a tricky one because let us not forget the rebound that is coming looks large when measured in percentage terms. It is relatively small when you measure the dollar figures versus the amount of weakness we have seen so far. Part of it to me is at least partly technically-driven. Oil was very-very oversold and we are seeing some of that rebound began to come through. I suppose my struggle is that we have not really seen any significant shift in terms of supply. We have not seen key suppliers say that they are either going to cut back or they are happy with the price where they are. So that is the only reason that we are reluctant to say that oil has bottomed.
I mean that was always going to be a difficult call. But the reality is, we know we have seen a bulk of the weakness behind us. It is quite possible that oil does weaken a little bit further, but we do know that we are likely to end the year a little bit higher. But I would not be too worried about oil rebounding all the way back to 100 or so. We are quite some distance away from that.
ET Now: So what is in store then for equity markets at large, particularly India and the APAC region? Does it look like we are still in for a good move in calendar year 15 because we have had a very good start for sure and a lot of people are moving towards the argument that valuations are now looking a tad bit expensive?
Manpreet Gill: Yes, I think we will have a very good full calendar year and that perspective is important to keep in mind because as long as earnings growth comes through, economic growth comes through, that should remain supportive. Having said that, you are right. I mean India in particular have had a very good run so far. It would not be unusual, in fact it will be healthy almost to have a bit of pullback. But what is important is to remember that in markets like the current environment where upward momentum is very-very strong, it is important to either stay invested or use even relatively shallow pullbacks to invest.
That is because the lesson from similar strong momentum bull markets, take the US for example, is that some of those pullbacks can be shallower than we may otherwise expect. So we would rather stay invested or use the opportunities to invest rather than looking for specific levels because with a 12-month basis, we are positive on India. More broadly in Asia, there is a similar story though it is still very much a selective story. We think China is another market worth looking at, but India remains very much our top call at the moment.
ET Now: The piece of the puzzle as you mentioned about crude, what about the other commodities? Till now India has benefitted a lot or at least companies seem to have benefitted a lot. It is probably not showing in numbers as of now by the commodity price fall, what happens to the rest of the commodity pack aside of crude? How do you think they will shape up and impact a commodity-importing country like India?
Manpreet Gill: The rest of the commodity pack arguably has a slightly weaker outlook than crude. We are talking about industrial metals because at a starting point, we have not seen similar magnitude of falls. I guess you could stay in metals like copper, an aggregate over the past three to four years. But we did see the strong break lower about a month back in copper prices. So there is risk, this could fall further because the single bigger source of demand still is China and we have not really seen any signs of demand picking up in a big way there.
So again to me, for commodity prices, particularly of the sort we see, the outlook is definitely supportive. A Little bit of weakness is possible from the point where prices rebound or bottom out. A little bit of rebound is likely in crude, but also across others. But I am not really looking for any kind of strong rebound that might start having an impact, for example, on the rupee or external balances. So it is more of a benign outlook from India’s perspective.
ET Now: What has been your assessment of the RBI governor’s commentary this time around? Does it seem sure that we will see a rate cut around the Budget?
Manpreet Gill: The RBI’s commentary was largely along expected lines. Since we just had a rate cut, it would be almost too soon to have yet another one a couple of weeks later. But the tone and the messaging were fairly consistent. It was really about the incoming data, particularly if not just growth but also about how inflation pans out. It is prudent to see how the budget pans out because the fiscal side and what kind of consolidation and whether we see some of those deficits targets being maintained, that also would be quite key to whether the RBI continues down this path of rate cut. So we think there is room for them to ease more, but we think they are sensibly trying to say that it also depends on the data, which is important.
ET Now: How do you think the data will shape up and therefore what is the interest rate trajectory over the course of the next three to six months post-Budget? Do you think there is the possibility of at least 25 to 50 bps rate cut?
Manpreet Gill: In our view, the data is likely supportive of further rate cuts and the policy will be supportive of rate cuts. So another 50 bps does not look unreasonable. The key is two things – one is to ensure that there are no negative surprises on the inflation front, particularly from oil. Second is that policy reform continues down the reform path and the fiscal consolidation continues down maintaining sort of fiscal deficit within the target. As long as we do get both of those, which is our view, we think there is room for the RBI to cut rates because if you look at real rates or rates net of inflation, they have actually gone up quite a lot simply because of how much inflation has fallen. That by itself is room enough for the RBI to cut rates, a bit further.
ET Now: What is the sense that you are getting about oil markets because they seem to be on a rebound? While it is auguring well for the rest of the world, you cannot say the same about India.
Manpreet Gill: Oil is definitely a tricky one because let us not forget the rebound that is coming looks large when measured in percentage terms. It is relatively small when you measure the dollar figures versus the amount of weakness we have seen so far. Part of it to me is at least partly technically-driven. Oil was very-very oversold and we are seeing some of that rebound began to come through. I suppose my struggle is that we have not really seen any significant shift in terms of supply. We have not seen key suppliers say that they are either going to cut back or they are happy with the price where they are. So that is the only reason that we are reluctant to say that oil has bottomed.
I mean that was always going to be a difficult call. But the reality is, we know we have seen a bulk of the weakness behind us. It is quite possible that oil does weaken a little bit further, but we do know that we are likely to end the year a little bit higher. But I would not be too worried about oil rebounding all the way back to 100 or so. We are quite some distance away from that.
ET Now: So what is in store then for equity markets at large, particularly India and the APAC region? Does it look like we are still in for a good move in calendar year 15 because we have had a very good start for sure and a lot of people are moving towards the argument that valuations are now looking a tad bit expensive?
Manpreet Gill: Yes, I think we will have a very good full calendar year and that perspective is important to keep in mind because as long as earnings growth comes through, economic growth comes through, that should remain supportive. Having said that, you are right. I mean India in particular have had a very good run so far. It would not be unusual, in fact it will be healthy almost to have a bit of pullback. But what is important is to remember that in markets like the current environment where upward momentum is very-very strong, it is important to either stay invested or use even relatively shallow pullbacks to invest.
That is because the lesson from similar strong momentum bull markets, take the US for example, is that some of those pullbacks can be shallower than we may otherwise expect. So we would rather stay invested or use the opportunities to invest rather than looking for specific levels because with a 12-month basis, we are positive on India. More broadly in Asia, there is a similar story though it is still very much a selective story. We think China is another market worth looking at, but India remains very much our top call at the moment.
ET Now: The piece of the puzzle as you mentioned about crude, what about the other commodities? Till now India has benefitted a lot or at least companies seem to have benefitted a lot. It is probably not showing in numbers as of now by the commodity price fall, what happens to the rest of the commodity pack aside of crude? How do you think they will shape up and impact a commodity-importing country like India?
Manpreet Gill: The rest of the commodity pack arguably has a slightly weaker outlook than crude. We are talking about industrial metals because at a starting point, we have not seen similar magnitude of falls. I guess you could stay in metals like copper, an aggregate over the past three to four years. But we did see the strong break lower about a month back in copper prices. So there is risk, this could fall further because the single bigger source of demand still is China and we have not really seen any signs of demand picking up in a big way there.
So again to me, for commodity prices, particularly of the sort we see, the outlook is definitely supportive. A Little bit of weakness is possible from the point where prices rebound or bottom out. A little bit of rebound is likely in crude, but also across others. But I am not really looking for any kind of strong rebound that might start having an impact, for example, on the rupee or external balances. So it is more of a benign outlook from India’s perspective.
Get Unlimited Access to The Economic Times
