Ridham Desai, head of research and equity strategist at Morgan Stanley India, has been with the financial services company since 1997. Over the years, he has become one of the most important voices in the Indian financial market.
Desai earlier served as an analyst at UBS Investment Bank. Before moving to equity research in 1992, Desai worked as a software engineer. He holds a Bachelor of Engineering degree inIn an interview with CNBC-TV18, Desai said the demand in the auto sector, which has been witnessing a slowdown, would increase in the next two-three months.
"I feel that at some point in time in the next two-three months, we should see a discernible turn in auto demand"
Talking about the RBI's rate decision, he said that the central bank is likely to cut rates again going forward. Besides, Desai also spoke on a number of topics including the new government's likely economic measures, the impact of US-China trade was on India's economy, among others.
Edited Excerpts: Q: The general belief is that from here on the midcaps should do better, market breadth should improve and domestic economy stocks should start to outperform. Is that a simplistic assumption or do you agree with that view?
A: I don’t think it is directly related to the election outcome. I think the economy has gone through soft spot for 4-5 months, which has largely to do with tightness in liquidity and problems that non-banks have faced but to a great extent, that liquidity tightness is already ebbing... I won’t be surprised if the RBI moves to neutral territory on liquidity, which it hasn’t for several months. You have to go all the way back to the demonetisation period when we had surplus liquidity and the reason for that was very specific to that event. So, if the RBI does do that, then we will have a much stronger economy in the second half.
Now if this is backed by some policy actions and there are a slew of things which the incoming administration can do, then I think the conviction that we are entering into a stronger growth environment will increase. So, my bet would be to buy domestic cyclicals; I particularly like the auto stocks. I think they are pricing in a significant slowdown and maybe even negative growth in FY20. I feel that at some point in time in the next two-three months, we should see a discernible turn in auto demand. I think the underlying consumption is not as badly hit as the headline numbers are showing, it is largely to do with the mismatch in production and the slowdown in consumption that we saw for 2-3 months and the inventory build-up is a consequence. I think we will see that this will be behind us pretty soon.
Q: What administrative measures are you expecting?
A: I don’t think it is necessarily from the government. There is a sequence of things that are about to happen. The first thing is that the RBI will meet for its rate decision. I think the likelihood is that they will cut rates again. Second is this ongoing liquidity infusion and we may be heading into neutral territory... it changes the rate transmission in the system. The rate transmission is severely affected by the liquidity deficit, so suddenly you get rates falling which should augur well for demand, which should augur well for the banks. The third is the Bimal Jalan Committee is going to decide on the RBI reserves and if assume for a moment that they are going to opine that the RBI has excess reserves, suddenly you have a bullet payment that becomes due to the government. Now the government can do a lot with that money — pay down debt, recapitalise the PSU banks. If it chose the latter then that is another big boost to the economy, and credit growth and to the banking sector because what the PSU banks today suffer from is lack of capital not lack of deposits.
Then we will head into the Union Budget and a lot could happen in that, which includes in my view the potential of a tax cut for corporate India. Finance minister Arun Jaitley had promised that two years ago and there has to be some follow up to that promise either in this Budget or the next one. So, I don’t think we should rule it out in this budget. I know there are fiscal constraints but we could get a little bit of fiscal slippage and this could be a slightly differently managed macro environment from 2014 because India has much better macro stability today — we have benign inflation, we have current account deficit that is pretty okay and we have a fiscal deficit that is significantly lower than it was five years ago. So a little bit of fiscal slippage may not be such a bad thing. So quite a few things lined up between now and early July for us to deal with.
Q: Talking about global cues, a lot of Wall Street participants believe that the trade war is here to stay and could get worse. What do you think implications could be on global flows especially into economies like India?
A: I think India is a little bit idiosyncratic. If you look at co-relations between India and emerging markets, they are actually at multiyear low and appropriately so because, amongst all the large emerging markets, India is least affected by the ongoing US-China trade tensions. To an extent, we are not affected on a relative basis but on an absolute basis, if things get worse and if this morphs into a full-blown trade war then there will be an impact on the global GDP growth and then there will be an impact on India as well. So we cannot remain unscathed. And one of the explanations for yesterday afternoons sell-off is that it reflected what was happening in the rest of the world, which was that the markets were very weak. I think that is a pretty meek explanation but quite clearly with the big event risk behind us, we may respond with greater correlation to what is happening globally.Then there is of course oil, which seems to be well behaved for now but there are potential Middle East threats as well that loom large on oil. I am not sure whether the Indian markets can handle both of them together the US-China in a trade war and oil prices going up because of some supply side issue in the Middle-East. I don’t think we have the ability to take both that could be big drag on the stock markets. In fact those are the biggest risks that we have going into the second half of this year.