Q&A: Pratik Gupta, Deutsche Equities (India)

'Inflation, oil biggest worries for India'
Ashish Rukhaiyar
Mumbai, 5 April 2011

Pratik Gupta, head of equities at Deutsche Equities (India) — ranked second in sales and research in the December 2010 Greeenwich Asia Survey — talks to Ashish Rukhaiyar about the recent trends in equity markets and the outlook. Edited excerpts:

The Reserve Bank of India (RBI) is trying to fight inflation by raising interest rates. What will be the impact on growth and equity markets?
We believe RBI will continue with its gradual approach. We expect increase of another 75 basis points in policy rates. However, with domestic liquidity easing, the impact on lending and deposit rates may not be as much. We expect a modest slowdown in GDP growth to 8.5 per cent in FY12. However, this is when we assume that crude oil prices stay under control, we have a normal monsoon and there are no major external shocks. In such a scenario, we expect the market to do better in the second half, with the May state assembly elections a potential catalyst for further progress in economic reforms and market sentiment.

Global markets have been hit by the crisis in Japan and India has been no different. Are the markets through with the repercussions?
India has not been affected much by the crisis in Japan. However, if the radiation leak leads to a bigger disaster, it will once again affect the risk appetite and emerging-market equities, including India.

Are institutional investors worried about the recent political developments, including the spate of corruption-related issues that hit the market in quick succession?
On the domestic front, the biggest worry concerns inflation (mainly, energy and food) and political developments. Some investors are worried if these would lead to political unstability and affect decision-making. In general, the biggest worry has been the uncertainty over oil and the impact it will have on inflation and therefore, on interest rates and the overall growth of the economy.

What is the range of crude price India will be comfortable with?
In our view, we can just about manage with the current level of crude price, which is around $100-$110/bbl. Anything beyond that will start hurting the economy badly — both in terms of inflation and subsidy burden — and hence, interest rates and growth rates.

In your strategy report, you talk about a lot of short-term headwinds apart from crude.
Crude is clearly the biggest one, the second being the policy inertia which has been going on for the last few months. Another concern we are beginning to hear from investors — though a bit premature — is the risk of a poor monsoon, especially as it would exacerbate the problem of inflation if we were to face crop failure this year. The third is regarding the flows from emerging markets to the developed ones — “is the market rally of the last few days a short-term blip or would we see FII flows going out again?” In our view, April/May will prove to be an inflection point for the equity market as these concerns get digested and/or are addressed. Investors need to get ready for a potential 2H rally in that case.

How have the macro factors changed over the last year? Your latest India strategy report is quite similar to last year’s, which talked of short-term headwinds and strong long-term prospects.
With no India-specific negative factors, last year was perfect. Global flows were supportive towards emerging markets, India, in particular. This year, we do have some India-specific factors. While high oil prices affect everybody, India is disproportionately impacted. Countries like Korea, Japan or China will not be as badly impacted as India. We import 70 per cent of our oil requirements. Thus, oil is something that wasn’t there last year. Second, we saw a reversal of foreign flows from emerging markets to developed ones this year. In contrast, India was the biggest recipient of foreign inflows last year. Also, the earnings growth seemed quite good last year, as against the relatively weaker outlook for FY12.