‘We are dependent on FIIs for liquidity'

Sneha Padiyath Mumbai | Updated on March 14, 2011


Indian equity market has to deepen for this to change

Mr Vijai Mantri, Managing Director and Chief Executive Officer, Pramerica Asset Managers Private Ltd, was the Vice-President at HDFC Mutual Fund and has also worked as the CEO of Deutsche Asset Management Company. In an interview to Business Line, he confesses to not tracking gold prices; and spoke about the various economic factors and their impact on the economy.

What is your take on the Budget move to allow FII investments into mutual funds?

First of all, we need to wait for the SEBI guidelines. FIIs are already investing in mutual funds but in small amounts and foreign retail investors already have 300 India-dedicated funds available to them.

So this move will be helpful for smaller funds like endowment funds, pension funds who want to take an India exposure of $25-50-100 million, but don't want to set up a full-fledged shop in India. For these guys it will become an opportunity. The government is allowing them an easier route through mutual funds.

Do you see the fund houses with a foreign partner gaining a distinct advantage since they already have an overseas distribution network?

I think we definitely have certain advantages in the long-term. As the size of the Indian mutual fund industry is small, this may look like a big opportunity. But the biggest opportunity is still the domestic people investing in domestic mutual funds.

A domestic investor usually invests about 90 per cent in domestic funds and only about 10 per cent outside. So from a long-term perspective we should be focusing on expanding the domestic retail investor base. How much can we depend on the money coming from outside?

Is that an issue in our country — our dependence on FIIs being too high?

In January 2011, FIIs took out about $2 billion, and the market tanked by 10 per cent. The volumes are very poor. There is no doubt that we are dependent on FIIs for the liquidity. For this to change, the Indian equity market needs to deepen.

It's a vicious cycle, until the equity markets deepen, the volatility will remain and if the volatility remains, the retail investors will stay away from the market.

The inherent volatility of the market is acceptable, but what about the volatility created by other, external or internal, factors?

See, the market is made of millions of participants. The factors that prompt a buyer to buy and seller to sell are the same. So market volatility, in the short-term, is nothing but the psychology of all of us put together. In the short-term, asset category shows volatility and not return. Return comes in the long-term and as long as you can go through that volatile phase, you will get that return. If you want returns and no volatility, then you should invest in FDs.

What is your view on gold prices?

I don't see gold as a hedge against inflation. Let me explain why, from 1935 to 1970, price of gold was $35. From 1970– 80, gold prices moved upto $850. From 1980-2004, it came down to $250. Didn't we have uncertainty during these periods?

After 1980, with globalisation the uncertainty was passed from one market to another. India can have 12 per cent inflation and gold may not move at all or have one per cent inflation and gold may shoot up.

So even gold is not a hedge against inflation. Even in this time period equities have done better than gold, then why should one invest in gold?

Where do you see oil prices and interest rates going?

In India we have 35 per cent savings rate, so rising interest rates means purchasing power goes up. Also, oil here is mainly used by industries and for transportation processes. So, the impact of oil and interest rates is not that great as it is made out to be. Definitely, it will impact central government finances, the current account deficit.

We may become a little vulnerable on the foreign exchange side. When the money goes out of the economy, the government will be forced to open up Foreign Direct Investment.

Also, let us not forget that when oil prices go up, some country will be making money and they will eventually invest in India because this is where the growth is.

Published on March 14, 2011

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