Commodity and currency volumes do fluctuate. But unlike equity markets, the cycles are not as long. Nirmal Jain, Chairman, India Infoline

Commodity and currency markets are unlikely to slump for long and retail interest in the market will lift if returns are sustained, says Nirmal Jain, Chairman of India Infoline.

Excerpts from an interview:

Brokerages began to offer commodity and currency segments to clients as a diversification from falling equity volumes. But of late, commodity and currency volumes have been falling too. Why is this? And what does this mean for the future of broking?

Commodity and currency volumes were lower in the last quarter on a sequential basis, primarily because of volatility in gold and silver and relatively stable forex rates. However, I do not think that this fall of one quarter should be interpreted as the start of a downtrend.

Commodity and currency volumes do fluctuate but unlike equity markets, the cycles are not as long and they tend to fluctuate on a quarter to quarter basis. I think the future of broking is bright. India’s economy over long term will grow at the rate of at least 7-8 per cent per annum in real terms, which means monetary performance will be about 13-14 per cent per annum.

Any economy which grows at this pace will see financial services growing at even faster. Therefore, not only commodity and currency, I think equity volumes too will improve. In case of equities, we have seen a downward trend for nearly four years; a similar kind of long downtrend in commodities is unlikely.

Do you think the entry of a third stock exchange will help expand the equity market?

Yes, it will definitely aid the growth of equity market with new products, arbitrage opportunities and competition. MCX has a good track record in the commodities market where it has emerged as a market leader. But gaining market share in equities will be more challenging as the other two exchanges are very well established and have robust management. Yet, given the long term potential of equities in India, a third stock exchange is welcome. The impact of market expansion and increased volume will, however, be felt over a medium to long term.

With broader markets rising 25 per cent plus in the last one year, do you see a revival in retail interest in the cash market?

The Nifty has delivered more than 25 per cent return in calendar year 2012. Logically speaking, this should have seen a revival in retail interest. Unfortunately, we haven’t seen any material retail lift in the cash market. My experience with retail investors is that they tend to focus more on IPOs and mid and small-caps, which have not seen a significant rise. To see increased retail activity, we possibly need a sustainable market performance and clearer visibility of uptrend.

Financial savings have been falling while people seem to increasing investments in gold and real-estate. What steps must the government take to reverse this trend?

The trend in falling financial savings of households is worrying. The government has initiated a few steps to check this fall like hiking the import duty on gold from 4 per cent to 6 per cent. Still, more needs to be done as it has now declined to a level prevailing two decades back. Real deposit rates are negative. It is imperative that the RBI, keeping this in mind, does not cut rates too aggressively in the near term, as that would further encourage diversion of household savings into non-financial assets. The run-away rise in real estate prices must be moderated through adequate monetary and policy response. Further sops may be required to encourage people’s savings into financial assets.

Last fiscal started with the expectation that Sensex profits will expand by 14 per cent. This has not been met. FY14 estimates now factor in double digit growth. Will this materialise? What triggers will be required for this?

Consensus earnings estimates for the Sensex have seen a downgrade of about 18 per cent in FY13. On this lower base, a 14 per cent expansion in profits in FY14 would be a reasonable assumption. Business confidence has improved following government action in the last few months and the need of the hour is to make the business environment conducive with sustained policy action, especially in areas of infrastructure, power, mining, land acquisition; control inflation and moving towards a lower interest rate regime.

What sectors is IIFL most bullish on now?

A stock-specific approach is more suited in the current environment. Themes that we like are the pharma sector due to the generic opportunity in US; PSU oil majors due to deregulation of fuel prices, IT industry on account of improved demand environment for Indian IT and benefits from a depreciated Rupee and cement on expectations of demand outpacing capacity addition, especially in North India.

(This article was published on February 16, 2013)
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