Morgan Stanley’s Ridham Desai’s Take On Key Sectors As He Bets On Pick-Up In Growth
Ridham Desai expects the shift in the Reserve Bank of India’s monetary policy stance from “neutral” to “accommodative” and its focus on growth to boost India’s economic performance in the coming year.
“There’s a distinct shift in the central bank’s thinking about the economy,” the India equity strategist at Morgan Stanley told BloombergQuint, adding that the nation’s economic performance over the last two years suffered because of the tighter monetary policy. “We’re now moving away from it.”
The RBI has been very successful in reining in inflation, and now sees the need to be a little more sensitive to growth.Ridham Desai, India Equity Strategist, Morgan Stanley
“I wouldn’t get bearish on macro growth for the next twelve months at all,” he said. “I think we’re in a period where growth is going to be strong. The only caveat here is global factors, which we don’t control.”
Desai also supported the RBI’s revised circular on stressed assets, which eased provisions and timelines for their resolution.
Uncertain Global Cues
The biggest impact to Indian economic growth, according to Desai, could come from a spillover of the U.S.-China trade war as India is generally immune—but not entirely—to the phenomenon.
“If this trade war morphs into a bigger problem, it could slow global growth. It could even take the U.S. into a much slower growth profile in the next 12 months and that will have an impact on India's growth rate,” Desai said. “India can’t operate in isolation.”
The only “collateral positive” of a global growth slowdown would be that the U.S. Federal Reserve would be off the pedal, he said, referring to its interest rate hike mechanism. He said that would help India to maintain softer interest rates at the moment.
Foreign Interest In India
Desai expects the current foreign inflow trend to sustain, led by rising investor interest. “India looks like a place which will outperform emerging markets for the remainder of 2019.”
- Expects disruption.
- Immediate concern for investors is the slowdown.
- The worst may be over, with outcomes to be seen in next two to three months.
- Slowdown precipitated by liquidity crunch in banking sector.
- Wholesale-funded entities are going through cyclical stress.
- Retail facing banks to benefit from slowdown in wholesale-funded entities
- Says oil should be seen as relative to copper.
- Oil falling relative to copper is great news for Nifty, as it outperforms in such situations.
- This means oil has positive supply dynamics from the Indian perspective.
Watch the full interview here:
Read edited excerpts of the interview:
The RBI came up with a revised Feb. 12 circular on stressed asset rules, or the new June circular. There is new development that the State Bank of India is starting to move for a new benchmark for home loans and what it does to the housing finance companies. What have you made of it?
There is a distinct shift in the central bank’s thinking about the economy. The last two years economic performance, or lack thereof, was largely because of the monetary phenomena and we are now moving away from it. The RBI has been very successful in reining in inflation and sees the need for growth. The RBI policy is going to be ‘accommodative’ and liquidity is most likely neutral, if not surplus, and it is a great news for growth. I will not get bearish on macro growth for the next 12 months at all. We are in a period where growth is going to be strong. The only caveat here is global factors, which we don’t control, and there could be some bad news from global.
The circular on Friday is good. It is a good rectification of the experiment which the RBI started last year. A lot of feedback came. Some of the things which they put in earlier circular where not practical, like the one day default thing. I think this is a more practical circular. This is how business is done on ground. So it reacts to the needs of the banks. There is a greater trust imposed on banks to take the call, which is the way it should be. Banks are earning a business and I think you should trust them to make the call under the framework of supervision of the central bank. This is very good circular in my view.
You mentioned the global issues. Do you want to dwell on it?
Globe has got a challenge from spillovers of trade war. While we are generally immune to it as an economy, I don’t think we are completely immune. To that extent if trade war morphs into a bigger problem, then it could slowdown global growth. It could even take the U.S. into a much slower growth profile in the next 12 months. That will have an impact on India’s growth rate. We cannot operate in isolation. India is sixth largest economy in world, and it cannot operate in isolation. So to a certain extent, it will be affected. I have to caveat any absolute growth targets with global situation.
One of the collateral positives which come out of the slow growth is that the Fed will be off the peddle, which is okay as it lets India to maintain softer rates and which is what India needs right now. If the Fed gets on the peddle, then it gets harder for us to respond. We can afford to have slightly lower interest rates in line with our lower inflation while the Fed and the U.S. deal with spillovers of the trade war.
Oil is a direct function of growth. I don’t look at oil in absolute terms. I look at oil as relative to copper. Copper and oil, both has got two dynamics in it. They respond to the global growth and they respond to their own supply idiosyncrasies. It is very hard to differentiate that in real time basis. So, the way to differentiate is that you do oil relative to copper. That takes the global growth factor out. If oil is rising relative to copper, it is largely because of idiosyncratic supply factor. Right now, oil is falling relative to copper and if you go back 20 years, then that’s great news for Nifty. The Nifty tends to outperform when oil is falling relative to copper, which is that oil has got positive supply dynamics from an India perspective.
Your large portion of client is global in nature. What do you think happens in the course of the next 12 months? We don’t know in which way global trade war will shape up? But, how comfortable are your clients putting money into India?
I keep saying that I get half of my calls wrong and half of them right. So one of the calls which we got right last year was that the foreign investors will be back, and they are back, and this sustains for a while. The framework for that call was that the foreign positioning in India was at multi-year lows and had fallen to 2011 levels, when they where very light on India. It required a little bit of outperformance from India for them to turn in and that’s what had happened. India has outperformed and foreigners are back. Flows are a direct function of how you perform and not the other way around. It’s performance that drives flows. India looks like a place, which will outperform emerging markets for the remainder of 2019. I think our flows should be quite good. There is a lot of interest in India right now.