There is no clear-cut exit policy for FDI

K.Raghavendra Rao
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Rangachari Muralikrishnan, Head-Institutional Equities at Karvy Stock Broking, is no stranger to the equity market.

With three decades of experience as a banker, fund manager and head of equities, he has been instrumental in setting up and streamlining the institutional equities business at Karvy.

In an interview to Business Line, he discusses issues that currently influence investor behaviour ranging from Euro Zone to inflation.

What could be the impact of the Euro Zone’s debt crisis on India?

If you leave out Germany and France from the Euro Zone, their numbers are really bad. All other countries have to take up austerity measures as deficit financing cannot go on forever.

India’s export exposure to the US and the Euro Zone has come down from 50 per cent in 2000 to 31.7 per cent in 2010. This should insulate India from an immediate hit.

What about India’s exposure to the Euro zone?

A sizeable chunk of India’s credit (45.7 per cent of its total foreign liabilities) comes from the Euro Zone. About $132.8 billion is coming up for rollover. A part of this will happen at higher cost and the remaining might be pushed to Indian banks.

What does this do to our economics?

Our growth rates are still better than most parts of the world. However, it could get affected if our investment grade sovereign rating gets downgraded. We have issues related to policy making, currency depreciation but growth is still there.

So, what do we do with these internal issues related to fiscal deficit?

The only way is to reduce subsidies and hike diesel prices. Merely balancing income and expenditure would not help. The rise in diesel prices may be done in a staggered manner. Consumption of highly subsidised items should be reduced and costs passed on.

A deficit monsoon could increase social sector spending this year.

During the banking crisis a few years ago, sovereigns ensured a bailout. Who will bail out in case sovereigns themselves get into a crisis?

Fortunately, imports are not picking up on rising crude and depreciating rupee. Though the rupee is expected to settle between Rs 50 and Rs 52 to a dollar, the signs of growth slowing down are evident.

Tax collections are expected to be hit, PSU divestments will remain a challenge. Take the case of two wheelers. Though fairly insulated from economic downturn, sales are dipping on slowdown in the base level income of people. Those with export sales will sustain volumes but not pure domestic players.

And what about inflation?

Rural demand in excess of 20 per cent for consumer durables, FMCG and two-wheelers has more than made up for a slowdown in urban areas. However, the consumer price index is expected to be high with increasing input costs pushing high food inflation. Supply side has to be addressed.

Why are crude prices so high?

Global crude prices are not a reflection of actual consumption but of trader positions. Marketmen are always on the look out for opportunities. Many a time, they try to recoup losses booked in one asset class by making profits in another.

Your take on the slowdown in capex?

Project completion in FY12 is likely to be the highest to date (since Independence) at Rs 4.2 lakh crore. Plus, there are enough project pipelines for a couple of years. The problem lies elsewhere. Since 2006, it is the SMEs who have primarily done capex in India.

And, when costs are padded up in their projects for no fault of theirs, they become uncompetitive.

Lack of uninterrupted power supply because of coal shortage, differential VAT and Sales Tax, and allied issues render projects unviable. Policymakers should address this.

So, what about FDI?

Business rules should be very clear. For instance, there is no clear cut exit policy for FDI. The cost of doing business remains very high in India.

Take the case of the telecom sector. First the 2G spectrum licence was Rs 1,659 crore and now it is Rs 14,000 crore.

Earlier, telecom was an under-penetrated business. Companies will find it very difficult to roll out 3G or broadband at current cost.

It is a Catch 22 situation. Demand will be subdued if tariffs are high and companies will be out of pocket if they slash rates.

How has your approach to institutional equities business changed?

It is getting more research driven and knowledge based. The perspective has to be global.

In-depth understanding of sectors is must. One needs to understand the impact of global macros on emerging markets and hence the direction of flows before taking stock calls.



During the banking crisis a few years ago, sovereigns ensured a bailout. Who will bail out in case sovereigns themselves get into a crisis? — Rangachari Muralikrishnan, Head-Institutional Equities at Karvy Stock Broking

(This article was published in the Business Line print edition dated August 20, 2012)
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