The chances of ratings downgrade are quite low: Nikhil Johri

Interview with MD & CEO, BNP Paribas Asset Management India

India has been on the watchlist of rating agencies, given the frequent revisions in the growth projections. Nikhil Johri, managing director and chief executive officer, BNP Paribas Asset Management India, tells Puneet Wadhwa in an interview that while frequent lowering of growth projection is a cause for concern, from a credit rating perspective it is more than compensated by improvement in the fiscal picture. Edited excerpts:

What is the sense you are getting from the foreign institutional investors (FIIs) as regards India? Do opportunities in other emerging markets / BRIC countries appear more lucrative?
FIIs continue to view India favourably despite the recent relative underperformance of India versus other emerging markets (EMs) and developed markets. Their confidence largely appears to be based on the belief that the worst is over for the Indian economy. And, with continuing reforms, fiscal consolidation and lower interest rates, things should steadily start looking up for India. The phase of policy rate cuts augurs well for the markets.

Moody's reiterated its stance regarding India's rating recently. How high are the chances of a downgrade now? Is the confidence beginning to shake as regards India's economic growth given the frequent projection revisions?

The chances of a downgrade are quite low in our opinion. The Indian government is on the path of fiscal consolidation as seen in the 5.2 per cent deficit for FY13 and 4.8 per cent projected for FY14. Of course, if, for any reason, the government is unable to stay on this course, then the risk of a downgrade will go up. Frequent lowering of growth projection is concerning, but from a credit rating perspective, it's more than compensated by improvement in the fiscal picture.

How much room do you think the Reserve Bank of India (RBI) now has to slash key rates?
At 2.4 per cent year-on-year (y-o-y), the IIP (index of industrial production) print for January 2013 is certainly positive and better-than-expectations. But one swallow does not make a summer. The IIP data has always been quite volatile and one has to be cautious in any extrapolation. Thus, we believe a single strong print is unlikely to change RBI's monetary stance. We expect slow, but steady, easing to continue.

How do you see the corporate earnings panning out over the next 12-18 months?

Corporate earnings disappointed somewhat in Q3FY13. We are looking at about 12-15 per cent earnings growth for FY14. This forecast is on steady ground currently, but if the Indian and/or global economy were to worsen over the next few quarters, then some downgrade in earnings is possible.

FIIs have now been permitted to trade in exchange-traded currency derivatives to help them cover currency risk. How do you interpret this development? How do you see the rupee-dollar panning out over the next few months?
This is a good move. In general, introducing new players or a new category of players to any market aids liquidity and helps in reducing volatility. We see no reason why it should be any different for exchange-traded forex derivatives. We have no specific target in the rupee-dollar for the next few months. However, a weak current account is being balanced by strong capital flows, thus keeping the rupee reasonably steady. Having said that, a moderate depreciation in the rupee against the dollar is very likely.

The mutual fund (MF) industry has been seeing waning investor interest, which is evident from the closure in equity folios in the past one year. What do you attribute this to? Are you also facing redemption pressure?
It's incorrect to say that the MF industry as a whole is seeing waning interest. The debt funds are attracting strong inflows, whether in fixed maturity plans, dynamic open-ended debt funds or short-term debt funds. Yes, equity funds are not attracting strong inflows as expected. However, with the launch of RGESS (Rajiv Gandhi Equity Savings Scheme), more retail investments are likely to come to the equity funds. The anticipated rate cuts should also trigger greater investor interest in equity funds.

What has been your equity and debt market strategy in this scenario?
In the equity segment, we continue to remain focused on good quality growth businesses rather than trading market volatility. This disciplined approach has helped us stay comfortably ahead of the benchmark in all our equity funds for the past three years. We are almost fully invested in our funds. As regards debt, we continue to believe that the interest rates will come down this year and thus are enthusiastic about the longer duration securities in our dynamic debt funds. We are neutral in our outlook on gold. However, in the phase of continued high inflation, the yellow metal is likely to do well as a hedge to inflation.

Which sectors or stocks, according to you, still offer value from a medium-term perspective?
We remain overweight on private banks, telecom, healthcare and consumer goods and underweight on metals, industrials, public sector banks and energy. Value is emerging in few underperforming sectors like capital goods and PSU banks, but it may be a while before we see a turnaround in them.