"We believe there is still time for a pause in rate hike as all three variables - CPI inflation, core inflation and Rupee depreciation - are still above the Reserve Bank of India's (RBI) comfort level," said Jaiprakash Toshniwal, Senior Equity Research Analyst & Fund Manager – Equity at LIC Mutual Fund Asset Management.
In an interview with Moneycontrol, Toshniwal said he also feels that the RBI is expected to follow into the steps of the United States' Federal Reserve -- which in its recent FOMC has indicated no sign of pause.
Banking, Financial Services & Insurance (BFSI), Information Technology (IT), Capital Goods and Export led manufacturing sectors are among the few which look attractive after recent correction, he feels. Here are edited excerpts of our interview with Toshniwal, who has more than 13 years of experience in equity research and fund management.
Primary market has lost enthusiasm in first quarter of this calendar year. Do you think the companies, which have permission from the Securities and Exchange Board of India (SEBI) to go ahead, will come with reasonable valuations considering the current equity market environment?
The activity in the primary market is the function of the market sentiments, investor appetite and valuations. At present we see the sentiment is negative due to the multiple factors and investor appetite is low reflected in the foreign institutional investor (FII) outflows.
Hence to that extent, we may see some postponement of some initial public offers (IPOs). However, the SEBI approval comes with some time limit due to which we may also see some companies going ahead with their plans for IPOs.
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Do you think the monsoon is going to be a key factor to watch out for?
Monsoon has always been the key indicator of rural economic activities. However, in recent times we have seen the impact of lower monsoon, kind of moderating due to several factors such as -- 1) high rural wage growth, 2) horticulture production increasing in the rural areas, 3) higher reservoir levels, and 4) government Insurance schemes limiting the crop loss to farmers.
So, while we are watchful for the trajectory of monsoon, one must also factor trends of the above mentioned points before reaching to a conclusion.
Do you see increased chances of recession in the US and Europe after the recent turmoil in the banking space?
It is difficult for us to say at this point with absolute certainty. The market is concerned on US recession since last one year and for Europe, talk of geographic recession has been the topic of discussion since the announcement of the Brexit.
However, if we look at the data, specifically for US – both the labour market and consumer sentiments, point towards a decent growth and the Fed is trying to reduce inflation and ready to sacrifice some growth in the process. Thus, it’s imperative to evaluate the data on the regular basis to reach at a final conclusion.
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Now do you expect the RBI to take a pause in rate hike cycle after likely 25 bps hike in repo rate in April policy meeting?
There is a possibility of a pause, however the chances are less. The key factors driving the RBI's rate hike stance are CPI inflation, core inflation and Rupee depreciation. All the three variables are still above the RBI comfort level.
Hence, we believe there is still time for a pause. Additionally, RBI is expected to follow into the steps of Fed move (which in its recent FOMC has indicated no sign of pause).
Do you think the interest rate cut by RBI is necessary in later part of this year to boost growth?
It does helps. While interest rate is not the sole factor for growth but a lower cost of capital certainly helps in fixed asset formation and also pushes consumer spending.
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As the government is focusing on the manufactured led economic growth in the near term – a lower cost of capital certainly adds to the near term growth factors.
Sectors that really look attractive after recent correction?
BFSI, IT, Capital Goods and Export led manufacturing sectors are few sectors which looks attractive after recent correction. Some of the consumer facing companies have also seen valuation normalizing during the recent market corrections.
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