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Record FII inflows likely in 2012: G Chokkalingam

Interview with Executive director and CIO, Centrum Wealth Management

Mehul Shah  |  Mumbai 

Indian shares are likely to remain firm during the next three months as the Reserve Bank of India (RBI) starts cutting rates and some pending economic reforms are likely implemented, says G Chokkalingam, executive director and chief investment officer at Centrum Wealth Management. Excerpts from an interview with Mehul Shah:

The three key events in March — Assembly elections, RBI policy and Union Budget — have not unfolded according to market expectations. What would be the key triggers for the Indian market from here on? How do you expect the market to behave over the next two-three months?
We expect the equity market to remain quite firm during the next three months, that is, till the monsoon forecast is released by the Met department in May. The triggers would be an actual reversal of the interest rate cycle and the passage of pending economic reform measures, such as banking, insurance and pension Bills in Parliament. Two major political parties (Samajwadi Party and Bahujan Samaj Party) not part of the ruling coalition have voted in favour of the government on an Act related to terrorism in the Rajya Sabha (support in Rajya Sabha is crucial for the passage of economic Bills) a few days ago. This gives us some hope for the passage of pending economic Bills.

After the Budget, many economists have started scaling back expectations on the quantum of RBI rate cuts this year. Has the market priced in a lower quantum of cuts?
We do not believe the market has discounted even a lower quantum of rate cuts within three months.

We expect a significant upside when the cut is actually implemented. Moreover, if the forthcoming monsoon is normal and crude oil prices don’t spike, the rate cut could even be aggressive. The country is expected to see record foodgrain production this crop year. Also, the base effect would help moderate the headline inflation, going forward. Let us recall that the years 2010 and 2011 saw an average inflation of 9.5 per cent and therefore, cumulatively, the base of headline inflation index has risen 17 per cent in the last two years, while oil prices have risen about 28 per cent. Also, the industry growth slowing down and banking credit growth hovering at around 16 per cent — significantly lower than the RBI’s targeted rate of 18 per cent — would call for the reversal of benchmark interest rate quite soon.

Strong inflows from foreign investors have been driving the market this year. Do you expect this to continue?

We firmly believe the equity market is likely to see record inflows by foreign institutional investors (FIIs) in 2012. A reversal of the interest rate cycle and, hence, a reversal in industry slowdown would lead to an improvement in corporate tax revenues and service tax revenue collections, thereby improving fiscal consolidation and corporate earnings. Also, considering India would still remain the second fastest-growing economy in the world and given the monetary expansions in the West, we expect steep inflows (about $30 billion) by FIIs in 2012.

What are the major risks for the Indian market in the next two-three months? Any possibility of a deeper correction?
A steep jump in oil prices, due to global political turmoil rather than economic factors, with prices staying at elevated levels beyond two months and an adverse monsoon forecast remain possible risks. Otherwise, we do not expect a steeper correction.

There is hardly any participation from retail investors in the stock market. What’s the mood among your clients?
As we come from the wealth platform and the valuation of the domestic equity market is also back to the 2007-level, we keep accumulating deep-value stocks with good governance experience on every downward fluctuation caused by periodic negative perceptions, which are “solely news-driven”. Most clients are quite excited about our strategy.

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First Published: Tue, April 03 2012. 00:00 IST