Prospects of rate hike to slow down India's growth: Moody's

Research firm Moody's has said that prospects of further rate hikes by the Reserve Bank is likely to slow down the growth of Indian economy in 2011-12.

It, however, added that headline inflation in the country is expected to remain at around 9 per cent in the coming months.

"With Indian policymakers signalling additional interest rate hikes are needed to cool inflation, growth will slow through the end of the year," Moody's Analytics said in an article 'Higher Rates Slow Indian Growth'.

The research firm had earlier forecast the Indian economy to grow by 8.2 per cent in 2011-12, compared to previous fiscal's 8.5 per cent.

"The Prime Minister's Economic Advisory Council revised its Indian growth forecast down to 8.2 per cent... and is now in line with our 8.2 per cent estimate," it said.

In its Economic Outlook for 2011-12 released last week, the PMEAC projected growth to slow down to 8.2 per cent, far below the government's pre-Budget survey expectation of 9 per cent.

In its annual monetary policy review, the RBI had also painted a gloomy picture and said that Indian economy would expand by only 8 per cent this fiscal.

The RBI has already hiked interest rates 11 times since March, 2010 to curb inflation. Headline inflation stood at 9.44 per cent in June.

"Tighter monetary policy is working to cool domestic demand. Manufacturing grew at the slowest pace in 20 months in July...," Moody's Analytics said.

It added, "Even though policymakers are engineering slower growth, the country's robust expansion remains firmly on track, and no hard-landing is expected".

Moody's, however, cautioned against spiralling inflation and said rising prices remain the prime risk India's robust medium-term growth projections.

"Inflation remains stubbornly strong, despite the central bank's aggressive monetary tightening over the past year... Inflation will sustain its current 9 per cent pace in coming months, before tighter monetary policy and rising agricultural production reduce food and demand-side inflation by year's end," Moody's Analytics said.

The PMEAC's outlook had also projected inflation to remain stubborn till at least October, mainly on account of high global commodity prices.

Source: http://economictimes.indiatimes.com/news/economy/policy/prospects-of-rate-hike-to-slow-down-indias-growth-moodys/articleshow/9514638.cms

‘We are underweight on companies with high leverage'

Earnings downgrades in select sectors may not be very worrying for the equity market as valuations are attractive for markets as a whole.

Ms Swati Kulkarni, Vice-President and Fund Manager for UTI Mutual Fund, says that rising interest rates and policy issues have slowed the investment cycle, even as the big picture doesn't look too gloomy.

Excerpts from an interview:

Downgrades to Sensex earnings estimates have been a concern for the markets for some time now. Do you see further downgrades happening now, with the rate increases? What does that spell for markets?

The downgrade concerns are mainly coming from the margin pressure due to high raw material prices, wage inflation and top-line concerns arising from limited pricing power in a phase of slowing economic growth. Commodity prices have softened a bit from the peak levels.

If the commodity correction persists due to slowing global growth, Indian companies will experience margin and earnings expansion.

Earnings downgrades in select sectors may not be very worrying for the equity market as valuations are attractive for markets as a whole. They are also below historical average multiples.

The market appears to be much more concerned about growth than value today. So many stocks and sectors available at low price-earnings multiples (PEs) are declining even further. Do you agree?

From a relative perspective, among the global equities, India has always remained a growth market.

The valuation premium over the developed market is justified with relatively higher expected growth.

Having said that, there could be certain stocks and sectors at any given point of time that may remain at lower valuations on account of certain concerns on earnings visibility or uncertain competitive scenario or simply because of excessive pessimism.

If we find that the concerns are priced in to a large extent, there could be an opportunity to gain from these value picks.

Is the premium the market is paying for consumption stocks justified? Much of the recent move in the markets has been driven by the consumption theme, with infra stocks completely out of favour. Do you see this trend reversing?

The preference for consumer stocks is clearly coming out of the strong demand visibility for the coming few years, backed by the rising income levels in urban and rural areas and demographic advantage — 50 per cent of the population in the working class for the next 20 years.

The premium valuation may sustain till we see initial signs of a pick-up in the investment cycle.

For that we may have to look for evidence that the rate hikes are done with and also increased activity in infrastructure ordering.

Will an erratic monsoon cloud the prospects on earnings?

Cumulative monsoon till date is only 3-4 per cent below normal. The risk is reducing as the monsoon advances.

Hypothetically, if we see a poor monsoon from here on, it may adversely affect consumer demand and worsen the inflation fears.

Recent macro indicators all signal a slowdown in the manufacturing side of the economy. What is triggering this slowdown? Is corporate India running up against capacity constraints?

The Index of Industrial Production has been very volatile in the past. There is a high base effect of last year coupled with the effect of monetary tightening.

Projects are being put on hold in certain sectors for clarity on policies, environmental clearances and fuel linkages.

Rising interest rates are another important factor in postponing of investment decisions. I hope that the slowdown does not result in worsening the supply-side issues, with their adverse structural impact on inflation in the system.

The Reserve Bank of India has been more aggressive than expected in hiking interest rates. How do you see companies coping with debt and interest costs?

Companies that are highly leveraged get affected on account of rising borrowing costs and also due to the limited ability to restructure capital in a not so benign capital market.

Added to these, the order intake is slowing, clients are postponing deliveries — choking off the cash flows for these companies.

We avoid or stay underweight on such companies in a rising interest scenario.

Many managers have been betting on mid-cap outperformance for quite some time now, but it somehow doesn't play out at all. Why and when do you see a catch up in mid-cap valuations?

Investors need to pick good companies which have the ability to withstand a challenging business environment especially during times of macro headwinds. One has to be stock specific here.

The mid-cap companies with competitive positioning, pricing power, product strength and financial strengths continue to outperform relatively, despite the tough environment.

For example, our own mid-cap dominant funds such as UTI Master Value Fund and UTI Mid-Cap Fund have posted 6 per cent and 10 per cent returns respectively in the last six months, when large-cap indices such as the BSE Sensex and S&P CNX Nifty have struggled to post positive returns.

Source: http://www.thehindubusinessline.com/features/investment-world/article2331162.ece

'US debt crisis to benefit Indian market'

The US debt crisis triggering deep cuts in the stock markets across the globe is likely to benefit India in due course, said a senior official associated with the market regulator Securities and Exchange Board of India (Sebi).

“The downward movement in the Indian market is a very short-term knee-jerk reaction,” the official said, adding once the situation stabilised, Indian markets would be very lucrative for FIIs.

“With the US credit rating getting downgraded by the Standard & Poor’s and most of the markets falling more than India, FIIs are set to move here as, at worst, the growth rate in the current financial year would be 7.5 per cent.”

Under pressure from the fears of a double-dip recession in the US and financial problems in Europe, stock markets worldwide including that of India, witnessed a substantial fall last week.

There is an apprehension of the situation worsening further on Monday with credit rating agency Standard & Poor on Saturday lowering the US credit rating from AAA to AA.

The official said in the immediate run, FIIs might sell in the Indian markets but while taking fresh positions, they will find the markets very attractively placed “Markets like India, which are well-regulated with good economic growth prospects and large number of companies, will certainly be preferred by the FIIs.”

The official said as far as retail investors were concerned, they would take time to come back to the markets. Sebi had recently announced a number of steps to bring back small investors to the stock markets.

As the markets are being driven by global cues, it is expected that the measures announced by the regulator to simplify processes would be beneficial in broadening the market base in the medium- and long-term, said the official.

The proposal to bring in Uniform KYC (know your customer) norms will have a major bearing in this regard, along with the steps announced to support mutual fund distribution and simplification of the IPO process, he said.

The simplification of Forms associated with investment in the financial market is also likely to help investors.

Source: http://www.business-standard.com/india/news/us-debt-crisis-to-benefit-indian-market/445047/