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End of rate cuts in India? Top managers give their verdict

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End of rate cuts in India? Top managers give their verdict
In a widely expected move, India’s central bank governor, Raghuram Rajan, cut the benchmark repo rate by 25 basis points to 7.25%, marking the third rate cut this year.

However, a rebound in oil prices and expectations of a relatively weaker monsoon, could lead to inflation creeping up again. That, in turn, could lead the rate-cutting cycle to come to a halt.

All this, even as most data suggest that the economy still hasn’t hit recovery mode.

Citywire Asia asked some top fund managers on what they expect from monetary policy for the rest of 2015 and whether they still see value in Indian equities.

Adrian Lim, Aberdeen AM

Senior investment manager on the Asian equities team

The latest rate cut wasn’t unexpected.

With conflicting data suggesting an economic recovery that is less than robust, governor Raghuram Rajan is ‘front loading’ rate cuts in case developments later this year make further reductions more difficult.  

The latest set of earnings reports has been mixed, which underscores the challenging business environment.

Companies are still waiting for concrete evidence of Prime Minister Narendra Modi delivering on reform pledges and corporates are holding back on investments, especially in key areas such as infrastructure development.

With India’s benchmark repo rate now at 7.25 per cent there’s still room for easing, but the possibility of poor monsoon rains and a recent recovery in oil prices could contribute to faster price rises.

This could delay further rate cuts.

Meanwhile, the prospect of the US Federal Reserve raising interest rates before the end of this year may also delay additional easing of monetary policy.

Even with the recent sell-off we think Indian equities are trading at levels that are hard to justify unless prices are supported by improvements in corporate earnings.

That said, we still see value in this market and we have been trimming existing holdings, taking advantage of recent price gains, to build up stakes in other companies. 

Prashant Khemka, GSAM

CIO, emerging market equities

The RBI’s repo rate-cut at its second bimonthly monetary policy meeting was widely expected. According to the Bank, the rationale for its third rate-cut this year was that while inflation has evolved along the projected path, investment and credit growth have remained slightly subdued.

However, the fairly hawkish commentary that accompanied the rate-cut seems to suggest that there might be a long pause before any further cuts in 2015.

We continue to believe consensus views underestimate the upside potential in the Indian equity market and the extent to which earnings can rebound.

We expect margins to return to historical averages and earnings growth to accelerate from the subdued high single-digit levels of the past three years to around 20%, set against a long-term average in the mid-teens.

On a forward price-to-earnings basis, the Indian equity market is trading at 16.3x, which is almost at a par with the long-term historical average of 15.5x.

Valuations may ultimately prove quite attractive if this is indeed the early stage of a multi-year earnings growth cycle. Even if multiples were to stay where they are, Indian markets can provide healthy earnings-based returns from here on.

Krishna Kumar, Eastspring Investments

Portfolio manager

While this rate cut seems to be in-line with expectations, the market seems to be have perceived RBI’s guidance as hawkish; but the central bank is no cheer leader. The desire to keep real rates in the region of 1.5 -2% is a stated objective of the central bank and that leaves little room for any cuts.

India headline valuations are trading close to historical averages while premium to the broader EM index has narrowed notably. However, as a bottom-up, long term valuation driven investor, we continue to find attractive value in certain pockets in India; especially in the domestic sectors.



Our India Funds are actively tilted on attractively valued companies with strong balance sheets and operational leverage; poised to gain from a pick-up in growth and revival of capex in FY 16.

Longer term, the market should grow in line with corporate earnings’ growth.

On the back of FY15 numbers, there may be room for further downgrades to FY16 numbers.

We expect economic activity to revive in a meaningful way only in calendar 2016 and earnings may witness a revival then.  

Manish Bhatia, Schroders

Asia ex-Japan equity portfolio manager

Today’s rate cut was generally in line with expectation. Further policy easing will be contingent upon how monsoons pan out.

There will be downside risks to economy and earnings of domestic-oriented sectors if rainfall is deficient. This emerging risk needs to be closely monitored over the next couple of months.

Rana Gupta, Manulife AM

MD, Indian equities

The rate cut was in line with expectations. Incoming data over last few months have shown growth recovery to be moderate, with inflation also running at sub-5% and whole sale price levels being negative on a year-on-year basis.

In that context, a 0.25% bps cut and an undertone suggesting a pause for some time may have been received negatively by some sections of the market.

We are pleased with policy rate reduction. Although the undertone did suggest a pause, we don't think that the rate cut cycle is over.

For us, the key for the rest of CY2015 is by how much banks can cut lending rates.

Going by the commentary that has come out, we think RBI will closely watch the progress of the monsoon and should it be inadequate, the government's action will become key.

Also, towards end of the year there are expectations that the US Fed will begin increasing rates.

We expect that most of the central banks across EM s (including RBI) will be in a wait and watch mode to confirm that the currency remains stable. Therefore, we don't see any further rate cuts happening during CY15.

However, if the above factors play out without the worst case outcome (i.e. India escapes a drought like scenario or EM currencies fall in face of rising USD etc) , there will be scope to reduce policy rates further during Q1CY16.

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