Foreign flows to India have been moving in conjunction with the overall emerging market (EM) flows. It is also aided by dovish global interest rates outlook and benign liquidity environment. In such an accommodative risk-on environment, the flow from passives is supportive, which is what we are currently witnessing. Once shorter-term uncertainty around the elections is over, active
will also start allocating, leading to a more stable flow. The risk factor would be the ever-changing global variables that can affect the shorter-term flow.
What has been your investment strategy over the past few months?
Since we are a risk-adjusted return fund, we generally are cautious on big binary events like an election. We take exposures to the market, albeit with a relatively higher hedge. Market valuations are very diverse, and it would be wrong to look at valuations only at the benchmark indices. Broadly, valuations are fair and going ahead, the markets would follow the earnings growth rather than price-to-earnings (P/E) expansion.
Globally, the growth forecasts are getting revised downwards, with inflation being very benign. What we have seen is that despite having an elongated accommodative stance on monetary and fiscal policies, global growth
is struggling. This will keep rates lower for longer with sufficient liquidity. Locally, we are likely to grow consistently, aided by resilient consumption and reviving investments amid a strong backdrop of structural reforms. On fiscal deficit, we have been largely within the targets; inflation is under tight control, led by lower food inflation.
The Monetary Policy Committee (MPC) is unlikely to change its accommodative stance unless oil spirals up and inflation trajectory changes.
Is the worst behind us regarding rupee and oil prices?
India has one of the highest real interest rates globally, and the benign global interest rate environment gives us an ample scope to cut rates. Surely, oil has to remain manageable, for having inflation expectations at the lower end. While we do expect rates to come down, one should also not lose focus on having durable liquidity for effective transmission to happen. Thus, we are bullish on interest rates and bond yields should head south, should the liquidity remain adequate. The rupee remains overvalued and there should be a slow gradual depreciation.
It is hazardous to try to predict earnings growth. However, with some reasonable confidence, I can say that earnings for FY20 will show considerable improvement. The banking and the finance sectors will lead earnings growth, which is a sizeable weight in benchmark indices. With interest rates staying benign, the effect of financial leverage would be positive on the broader market earnings.