Business Daily from THE HINDU group of publications
Thursday, Feb 15, 2007
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Business Daily from THE HINDU group of publications Thursday, Feb 15, 2007 ePaper |
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Markets
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Interview Money & Banking - CRR & Bank Rates
The Reserve Bank of India has marked up the cash reserve ratio (CRR) by 50 basis points to six per cent and impound for free about Rs 14,000 crore of bank funds. The hike in CRR, effective in two phases, will kick in on February 17. The second phase starts on March 3. In accordance with this, Mr Adrian Mowat, Chief Asian and Emerging Equity Strategist at JP Morgan, says that CRR hike has the potential to significantly dent equity markets. Excerpts from CNBC-TV18's exclusive interview with Mr Adrian Mowat. How are you reading these inflation figures and what the central bank is trying to do? Do you think it will significantly dent equity markets? I think it has the potential to significantly dent equity markets. When one looks at Indian equity markets, there are three levels of macro risk; you have got a high P/E, a relatively overvalued rupee and interest rates that have stayed relatively low considering the level of economic growth, and we associate these things with growth. The P/E multiples are high because growth is strong, the rupee has been firm because strong growth has attracted capital and that capital has helped keep interest rates low. Now we are seeing the market pushing up interest rates and if one looks at three-month commercial paper rates, you have gone from around 7-9.5, so the market is already tightening. Now we have got the RBI coming in with further tightening measures, which are going to push up market rates both of the deposit and the lending rates. So the risk is that the RBI is about to end the growth party and if growth begins to slow down then you are likely to see a lower P/E, a low rupee and a potentially higher interest rates and so we are concerned about this. How much collateral damage are you expecting then for the equity markets and for those interest rate sensitive sectors? I think the chances are that the markets will under perform the emerging markets for the balance of first half of this year and people are going to be anxious about the thematic sectors whether that be construction building material, to some extent public sector banks, which we think will see some problems as interest rates have moved higher. We would be recommending clients to focus on big blue chips. Be quite cautious about smaller mid-caps; they tend to be the areas that suffer the most when interest rates are rising. Do you think these rate hikes and the tightening generally in the economy can actually cool off some sectors like autos and real estate? I think its big-ticket consumerisation such as autos as well as real estate, which are vulnerable to this. The mortgage rates going up, and there are fixed rate mortgages in India, but there are also lot of floating rate mortgages, so there will be pressure on their disposable income as interest rates move higher. So I think you have identified the right sectors to be cautious about. When we stepped into February the sense was that there was some money waiting on the sidelines to be pumped into this market. Given what's happened in our macro picture, do you think that might get tempered a bit and this market will have to live with much lesser flows? There are definite flows still going into the emerging markets, and India will always get a share of those. However, there was a very interesting trend in the last couple of months when we were following the clients positioning in India versus the Index; most clients have now made the decision to go neutral in India and so they are actually adding money to the market in the last couple of months. So I think there is a vulnerability that people might decide to asset allocate to an underweight and you could see a flow of capital out of the Indian market. Could all of this trigger a sharp correction in India or do you think around the Budget you may not see such a sharp correction? What is your near-term tactical call on this market? I think there is a risk in emerging markets that once people start selling which you see sharper falls and that was certainly the lesson in May last year, but we saw the same thing in April and May 2004 and two smaller sell-offs in 2005 in emerging markets. So you can sometimes get this compounding effect.
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