You are here: Home » Markets » News
Business Standard

Stock & sector pickers' market

Motilal Oswal 

The Indian economy is presently facing multiple challenges. There are many negative factors polluting the current investment climate.

First, derailment in the management of the central government's public finances resulting in elevated fiscal deficit on a sustained basis due to the heavy subsidy burden, fiscal stimulus rolled out after the Lehman crisis and populist schemes directed towards rural India.

Second, compared to just one per cent in FY11, India’s current account deficit is likely to shoot up to 3.5 per cent both in FY12 as well as FY13. This, coupled with pressure on foreign inflows on capital account, will result in a net deficit in the balance of payments (BoP) account that was last seen in FY09 and before that in FY96.

Third, CPI continues to rule above the 8.5 per cent mark, stubbornly refusing to come down despite best efforts by the Reserve Bank of India (RBI), thus, seriously eroding the purchasing power and savings of Indians.

Fourth, broad money supply (M3) growth in India is subdued and has, in fact, fallen below the 15 per cent mark. This has been due to the conscious effort by RBI to run a tight monetary policy in order to get inflation under control as well as to ensure closure of bad businesses. Tight liquidity, coupled with higher cost of funding, are affecting credit growth and economic activity, thus, taking its toll on capital formation / corporate investment. RBI’s intervention in the forex market to stabilise the rupee is further adding to the liquidity crisis.

Fifth, depreciation of the rupee is further aggravating the crisis. Unlike China, accumulation of forex reserves in India during the last decade has been primarily due to capital account surplus and not any surplus in current account. This limits RBI’s capability in defending the rupee, as the forex reserves form a pool of borrowed capital and are consequently susceptible to withdrawal any time. Any effort by RBI to stem up the rupee will be futile due to the fact that when RBI sells dollars, it is in fact, buying the rupee, the supply of which is practically unlimited.

Sixth, crude oil prices have continued to remain above the comfort level of $100. Any spike in oil prices from the current levels will have a cascading effect on the fiscal deficit and current account deficit, result in imported inflation and amplify the pressure on exchange rates.

In view of the above, and no visible positive triggers in the short term, equity are likely to remain lacklustre and may witness a downside of around 10 per cent from current levels, as valuations at the long-term average P/E of 14x are not very demanding.

However, looking at the broader indices would be misleading as I believe this is going to be a stock pickers’ and sector pickers’ market. For instance, sectors that are structurally well placed, such as cement and auto have done well and will continue their upward trajectory over the medium to long term.

The author is chairman & MD, Motilal Oswal Securities

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Mon, April 02 2012. 00:19 IST
RECOMMENDED FOR YOU
.