Do you expect the Reserve Bank of India to be tolerant and is the credit policy going to be market moving in nature because while the second wave recovery is strong, on the global front, energy prices have skyrocketed?
Not only energy prices, commodities across the board have moved up very sharply and now there is a threat of food inflation being very high because of drought in South America. Overall, the task for the central banker is cut simply because of the fact they have put themselves so much in the corner by talking so dovish for so long that for them to try and become hawkish is also going to be a tough task.
Today there is an expectation that the action will only be on reverse repo and the policy will remain accommodative. Maybe they will have no other option but to go ahead with at least this policy because they can take shelter behind the reported CPI figures for last month which came in below expectations in India. That was very surprising given the way prices have moved up across the board.
However, there might be some data lag and that catchup might happen going forward but one thing is very clear that the ultra loose accommodative policy period is over now, not only in India but globally.
Interest rates could start moving up somewhat and investors need to be ready for that. We could see an increase in interest rates because revival is entrenched and because support does not need to be given to the same extent as earlier. Historically, economic growth starts getting constrained long after the interest rate hike cycle starts when the rates reach restrictive levels.
From an economic standpoint, we do not need to be so worried. However, the economy and markets are not linked on a day to day basis and markets obviously are elevated. Several global concerns are coming up due to potential tax increases on corporates in the US as well as the crisis in China. It is only a question of how long we can remain unscathed. Some amount gains have to be given up and if that happens, it makes the market healthier to invest in.
Could XUV 700 be the big game changing launch for Mahindra & Mahindra and will that make the market excited for next two-three quarters?
I think so because see M&M has typically been a company where the stock has outperformed in new product launch cycles. Typically, M&M has a series of launches and most of their launches end up being successful and that is something which markets typically do not appreciate so much about M&M as they do about other auto companies. Then they enter into an outperformance space which lasts for some time.
Secondly, purely on valuations, M&M is a cheap stock given the valuation of its subsidiaries and the fact that the farm operations have been resilient and could remain resilient and they could ride through a potential slump in auto sales due to their new product launches. Even at these prices, the stock looks okay but given the overall weakness in the market, we could potentially get it cheaper. But if people have a long enough horizon, they can start nibbling now.
One big cue for the week is the RBI policy but the second one is going to be IT earnings. How are you seeing this?
It is a challenge for the technology sector right now because expectations have become so high especially after Accenture’s results a couple of weeks back and the IT stock rallied further but most of these stocks are now trading at valuations which are at multi year high in the expectation that there will be growth acceleration which is possible and profitability will sustain. That could be a challenge given the fact that all of us have heard that there is huge demand for IT professionals and the salary hikes and the price which is being paid for new talent has gone up substantially.
In this context, how the growth profit paradigm is managed by these companies will be interesting to see. My personal expectation is that these companies could flag off some growth uptick but margins could come under pressure and both could balance out. At this stage, it looks like the IT stocks are well priced. I do not think there is any margin of safety left unless and until there is a significant surprise in earnings.