We Are Seeing A Situation Of Policy Before Politics.

In a frank and freewheeling interview with Nitin Jaiswal, Pravin Shah, executive director, Morgan Stanley and head of Morgan Stanley's research division, analyzed the recent measures introduced by the government and their impact on the Indian capital markets.

Q. Is the recent fall in interest rates sustainable in the medium term?

A. Yes, I believe that lower interest rates are sustainable in the medium term.However, I do not see any sharp fall or rise, at this point of time. The rates are likely to stabilize in a narrow band.

Till a few weeks back, even blue chip companies could not get funds at lower rates. However, take the example of GE Capital. In March 1996, it raised funds at 20 per cent and recently it borrowed funds at 13.75 per cent.

 

Q. But the funds are available to only AAA-rated companies, don't you think they should relax their credit lending criteria?

A. Banks are generally more careful about their NPAs, particularly in a slowdown. Moreover, with banks going public and also tapping the overseas market, they are becoming more accountable and hence are more focused on NPAs. With RBI also becoming strict about NPAs and capital adequacy being in focus, I do not see a scenario where there will be much relaxation with respect to their lending criteria.

Q. What will be the impact of measures like buy back of shares, funds against shares?

A. These are steps in the right direction. Every policy has its pros and cons. World over, shares are bought relative to their book value. This has not happened in India, because we didn't permit buy backs etc. and valuation was not done appropriately. But now we can expect the same to happen in India. However, it is necessary to have checks in place .

Q. After the sluggishness in 1995 and 1996, are we witnessing any reversal in the trend?

A. The trend reversal has already started. Interest rates and corporate taxes have come down and the benefits will be visible in the current year. Political uncertainties do exist, but their impact is decreasing.

Take the example of the recent credit policy, despite the political uncertainties, it was announced and even the budget was passed with a consensus. So the message has gone out loud and clear to the world: policies before politics. I think this is a good sign. But infrastructural constraints will tend to put a strain on growth for some more time to come.

The disappointing corporate performance has been discounted. The indecisiveness of the coalition government on the inevitable petro price hike is holding the market back. The market will analyze the quantum of its impact and take decisions.

Q. What does you feel about the current year's performance? What is your expectation about the BSE Sensex?

A. The current year's performance will be better than the previous year's results. While the first half results may not be very exciting, the second half's performance should be better.

As far, as my expectations about the market, I believe that given the

underlying fundamentals of the market the Sensex should be at around 4375 points by the year end. With the return from debt coming down and with the removal of tax on dividend income the yield from equities is beginning to look attractive. These should lure the investors back to the equity markets in the medium term.

Q. According to you which sectors will perform well in the current year?

A. Sectors whoch were protected by the government in the past through high duty structures like steel, paper and stand alone petrochemical, will find the going tough because duties are coming down. Their performance can improve only if the international prices goes up substantially.

By and large, most industries will do well, once the economic recovery takes place. Although we see sectors such as refineries, telecom, software and cosnumer goods doing well, we expect cyclical sectors such as cement and auto to do better.