A sustained yuan devaluation could be a positive for India from inflation point of view, building a stronger case for interest rate cuts, says Saumil Shah, MD & Head (Equity Sales Trading), Bank of America Merrill Lynch, in an interview with Devangi Gandhi. Excerpts:

Market volatility has gone up in the last two months. How do you see the Indian market in terms of attractiveness?

Foreigners have purchased shares worth $7 billion year-to-day versus $15 billion last year.  If one were to analyse the inflows, a substantial part is made up of block deals, rebalance flow and public offerings. The huge overweight of 500-bps-plus that India enjoyed in global emerging markets (GEM)  funds has come down to 350 bps approximately as GEM funds have lightened their overweight on India. Since July, net inflows have been close to $740 million. As investors start looking at India from a macro perspective, the Iran deal has been welcomed and we expect crude prices to go down by $5-10 a barrel in the next 6-8 months as that supply starts coming in.

Commodity prices are under pressure on the back of China slowdown, which is very positive for India from the inflation point of view. According to me, a big positive for Indian market is the way gold is beaten down.

Of course, monsoon is a concern with the cumulative rainfall so far lagging 9% from the average. However, sowing has been encouraging and government has kept the prices under check by managing supply. The main concern at this point for the market is the pick-up in the economy and growth in earnings. Earnings growth in the recently concluded earnings season was disappointing with marginally negative earnings growth.

We expect the earnings to remain weak in the near term. This is likely to result in more earnings downgrades. Thus, the current valuation of 16.5 times is actually closer to 18-times forward. After this quarter, there will be adjustments for the fact that the economy hasn’t really picked up. The good thing is, with oil prices coming down, consumption is likely to pick up and government could likely meet the allocation towards infra spending — especially in roads and railways. So, one is very hopeful, towards beginning of the next year, we will start to see a pick-up.

The conclusion of the monsoon session where the government could not push through key Bills is seen as a concern by many…

It is definitely a major concern as it stalls the reform process. It is now very clear that it will take some more time for the government to get these Bills passed.  So, if you ask me, currently markets are definitely are a bit on the higher side of the band. The positives are there in terms of a better macro picture, but what’s negative is earnings and growth have not picked up. The critical factor which the market and investors are looking for is when they start to see a pick-up in infra spending and key reform Bills, such as the GST and land Bill, get passed.

If you look at India against other countries, India stands out — in terms of external debt to GDP ratio, current account deficit.  Fiscal deficit is under control and the rupee has managed to stand ground and outperform versus other EM currencies. Of course, what might change is emerging markets like Korea and Taiwan improve and their fundamentals start to improve and you may see a reverse flow of funds.

The other factor that is supporting the market is the interest of the domestic investor. Since last April, more than $10 billion has made its way into domestic mutual funds — this is a very big positive for the markets. At a time when gold prices are crashing, real estate as an investment is losing its popularity, fixed-income funds are facing lower rates going ahead, equities as an asset class definitely looks attractive.  You can’t ignore domestic inflows anymore and it is a space that we need to watch more closely.

The momentum in foreign inflows has surely slowed down…

The net incremental flow has been quite low because GEM funds are already quite overweight on Indian market. Even as the overweight may have come down from over 500 bps to 350 bps, it still persists. The money which really hasn’t come is from the global funds. Emerging market fund that is well overweight on India and the impact of oil and commodity prices coming down is already factored in.

So, there’s no new catalyst for an EM fund in absence of earnings momentum to invest more in India. But it would still stay invested in India due to its relative attractiveness. The case is not there for global funds to come in as against an India or EM dedicated fund as they await triggers like growth and earnings recovery. Ultimately, this will happen as reforms take shape and infra spending picks up.

What impact could a sustained yuan devaluation can have on Indian markets and foreign flows?

Theoretically, yuan devaluation can have a negative impact on Indian exports. However, it also signals that all is not well in China and could lead to further softness in commodity prices which is beneficial for India. A sustained yuan devaluation thus could be positive for India from a Inflation point of view, building a stronger case for interest rate cuts. Also, typically if investors form a view that China will further devalue its currency then it might scare away the foreign flows from China into India.  Although one will have to be careful and have a bottoms up approach. For example, textiles is a sector that competes with China and could be impacted negatively.

“Fed hikes that signal US recovery are positive for India,” Bank of America Merrill Lynch said in a research note. (Photo: PTI)

The three major events that are likely to drive the Indian markets in the coming few weeks are rate hike by the US Federal Reserve, corporate earnings and Bihar polls, says a report by Bank of America Merrill Lynch.

According to the global financial services major, if markets price-in a Fed rate hike, it will get easier for the RBI to cut rates by 25 basis points on September 29.

“Fed hikes that signal US recovery are positive for India,” Bank of America Merrill Lynch said in a research note.

As the US growth stimulates export demand, it will rein in global commodity prices and would support the Indian rupee by rekindling risk appetite for high growth in emerging markets.

Moreover, even if the Fed delays, the RBI is unlikely to wait until December as deflationary pressures are picking pace, the report added.

RBI Governor Raghuram Rajan, in his third bi-monthly policy of the fiscal, left benchmark lending (repo) rate unchanged at 7.25 per cent as also the cash reserve ratio (CRR) at 4 per cent.

The Reserve Bank of India has already reduced the policy rate by a total of 75 basis points, or 0.75 per cent, since January.

The other major factor that would impact markets is corporate earnings as they are likely to drive FPI equity flows.

According to the global brokerage firm’s equity strategists, “corporate earnings are likely to begin to turn up in September from June’s anemic 1 per cent”.

The report further said that the Bihar polls would have a bearing on the course of reforms.

“We see three major event risks playing out in the next few weeks that will drive Indian markets,” BofA-ML India Economists Abhishek Gupta and Indranil Sen Gupta said in the research note.

“First, will the Fed finally hike on September 17, as our US economists expect?; secondly, will corporate earnings begin to turn around, as our equity strategists expect? and finally, how will Bihar vote?, the report said.

Infosys chief executive Vishal Sikka bought 10 per cent of the blue chip shares granted to him as restricted stock option units.

Infosys chief executive Vishal Sikka bought 10 per cent of the blue chip shares granted to him as restricted stock option units, the global software major said on Wednesday.

In a regulatory filing to the Bombay Stock Exchange (BSE), the company said the 10 per cent or 2,279 shares Sikka bought were equivalent to 9,116 shares post-two bonus issues, granted to all investors last fiscal (2014-15).

“In accordance with the first restricted stock units granted on August 21, 2014 to Vishal Sikka, he has exercised the option to buy 10 percent of them, numbering 2,279 shares, which are equivalent to 9,116 shares post-bonus issues,” company secretary A.G.S. Manikantha said in the filing.

The IT outsourcing firm also granted 124,061 shares, valued at Rs.5 on par, to its first non-founder chief executive on June 23 as restricted stock units in accordance with provisions of the 2011 plan for its board members.

The company’s scrip closed on Wednesday at Rs 1,065.35 on the BSE, which is 21.15 points less than Tuesday’s closing rate 1086.50 after opening at Rs 1,099 and touching a low of Rs.1,059 during the intra-day trading.

The 48-year-old Sikka is paid an annual salary of $5.08 million, with $2-million stock option. The package includes $900,000 base salary and $4.18 million as variable pay per annum.

The Reserve Bank on Wednesday said it has removed Hathway Cable & Datacom from its caution list and foreign investors can now buy more shares in the company. (Photo: Reuters image for representation only)

Hathway Cable & Datacom shares gained as much as 16 per cent in the morning trade on Thursday after the Reserve Bank of India (RBI) announced removal of restrictions placed on purchase of shares of the company by Foreign Institutional Investors (FIIs) and Registered Foreign Portfolios Investors (RFPI) with immediate effect.

The investments can go up to 74% (revised from earlier limit of 49% stipulated under Foreign Direct Investment policy) of the company’s paid up capital through GDR/ADR/FDI under the Portfolio Investment Scheme (PIS) in primary market and stock exchanges.

At 11.34 am, shares of Hathway Cable & Datacom were trading 8.91 per cent higher at Rs 44. It opened at Rs 45 and touched a high and low of Rs 46.90 and Rs 43.70, respectively. The BSE Sensex was up 300 points at 25,999.58.

On the NSE, the scrip was trading 9.23 per cent higher at Rs 43.80. The NSE Nifty was up 1.20 per cent at 7,885.20.

According to the BSE data, at present, FIIs hold 14.54 per cent stake in the company. On BSE, so far 10,10,000 shares were exchanged hands as against average daily volume of 28,000 shares in the past two weeks.

RBI regularly prevents FIIs from buying shares in companies if they approach the limit stipulated by regulations and then re-adjusts once foreign ownership falls below the prescribed level.

(With inputs from Reuters)