Daily Voice | This investment banker lists five reasons why rupee won#39;t move to 85 a dollar in short term

Market Outlook

Globally, experts largely expect 75 basis point hike in interest rates by the US Fed. But “more than the quantum of rate hike, one should perhaps start looking at the peak of the hiking cycle,” Ajay Garg, managing director of Equirus, said in an interview to Moneycontrol.

Also with mid-term polls later this year, the founder of Equirus is of the view that the Fed will continue to ease cuts as has been the approach so far rather than go for one sudden large cut to reach hiking cycle peak.

After the rupee fell below the 80 mark against the US dollar for the first time in history, Garg with over 22 years of experience in investment banking gave out five reasons the currency won’t be moving towards 85 in the short term, but can touch that low in the longer run as part of its natural course of depreciation.

Considering the global economic environment, do you think the Nifty50 can see 14,000-14,500 levels in coming months before resuming northwards journey?

There is a direct bearing on Nifty50 vis-à-vis the treasury yield in the US. Both hit lows in mid June where US 10 year treasury bond yield had touched 3.42 percent and Nifty50 touched 15,183. Since then the bond yields have come off the low and are trading at 2.75 percent and Nifty50 is at 16,700. It will be a while before the Nifty has a different trajectory, but clearly we are seeing very different trends in the Indian market.

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We did two wealth IPOs in the last 12 months and we clearly see a strong financialisation of Indian household savings and expect that current five percent allocation for equities (one percent improvement over the last five years) to change and strengthen the domestic flows.

With government also proposing 20 percent for EPFO, the size of domestic flows that equities market will witness is unprecedented. We will see also see this against the backdrop that FY23 will be the year when post-demonetisation, GST implementation, no Covid impact, and domestic consumption benefit will fully accrue to most companies.

So we believe in the long run, strong Indian macro will always pull the market upwards as and when it is impacted by disruptions caused by global market movements as we are currently seeing where markets in the last one month have given six percent returns.

Do you think the corporate earnings announced so far are largely in line with expectations? What are your thoughts?

Corporate earnings so far are in line or better than estimates. While the recovery in demand and catch-up in the lost momentum is so far maintaining growth. Companies dependent on domestic consumption will see their best period over the next two years.

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Global markets continue to be challenging, but that will cool down the commodities upsurge and will again be beneficial for the Indian companies who have been facing margin pressure for most part of this calendar year.

Who could be winners and losers among sectors if the rupee continues depreciating in the coming weeks? Also do you expect rupee at 85 against the US dollar?

Rupee depreciation is an ongoing and natural phenomenon for a country like India which runs a large current account deficit (CAD). Typically, a three to four percent depreciation every year is normal. Therefore, structurally, the strength of our companies and sectors is built on this inherent principle of  currency depreciation.

The recent movement in currency is driven by global factors and therefore to look at short term gains or losses from currency movements and formulating a long investment theory (for an asset class like equity) may not be appropriate.

It is important to also consider that the rupee depreciation of around seven percent YTD (year-to-date) is against dollar strengthening 12 percent. Rupee has appreciated versus other key developed market currencies like euro, pound and yen.

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The question as to whether rupee will climb to 85 against the US dollar – The answer to that is the timeframe one is considering. In the longer run, yes, given the natural course of depreciation. However, in the short term, a 5-6 percent movement is unlikely due to the following reasons: a) Reserve Bank of India (RBI) has maintained that defending rupee volatility is one of their objectives while not targeting any level. A 5-6 percent move is a very volatile move: b) RBI has already taken steps to accentuate flows from the debt side and contain CAD, namely, external commercial borrowings, FII flows, rupee invoicing; c) Given that the correction of rupee is largely from dollar strength, dollar should continue strengthening by 5-10 percent further which seems unlikely given that the US fundamentals are weakening and Fed hiking cycle is more or less priced in; d) RBI has been able to defend the volatility well so far with the use of reserves and it is noteworthy that rupee has not closed above 80 although having moved intra-day; e) We are already witnessing the reversal of larger outflows which will contain the pressure on the currency. While further depreciation in itself cannot be ruled out even in the short term, one would think that the RBI has enough ammunition to defend short term volatility.

Do you think IT space has bottomed out now and started off a new round of northwards journey?

IT sector impact has been largely driven by the risk of global headwinds which are not seeing signs of bottoming out soon. Globally inflation and aggressive rate hikes are likely to soften the respective domestic demand. The European region particularly is likely to remain constrained with the effects and after-effects of war while the US region is witnessing the pressures of very high inflation.

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That said, the slowdown is likely to be shallow as the inflation is expected to peak out by the end of the year or early next year with demand coming off. In addition, if energy prices led by oil see some resolution soon, it will be an added respite. Therefore, while one cannot say that the IT space has bottomed out, even if there is near term impact, the overall push for offshoring will increase and benefit the Indian IT space big time.

In the current recovery, FMCG space clocked more than 10 percent gains and was one of the gainers among top five sectors. So what are your thoughts and are you buying the space?

FMCG as a sector is driven more by domestic consumption and we remain a strong proponent of that theme. Although the average multiple of the few FMCG stocks makes it hard to invest in the space to generate alpha, which is a key focus at our end.

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Also one sees key risk of D2C (direct-to-consumer) and premiumisation trends causing concerns as can be seen the way these stocks have corrected in Indonesian markets. The sector is attractive, but one may have to look at specific fundamentals and stocks to play the theme.

What are your broad expectations from the Fed commentary? And do you expect 75 or 100 bp hike in interest rates by Fed?

The Fed is driven by its primary goal of price control and with US Inflation over 9 percent, the tone of aggression is expected to continue. However, given the sharp correction of Treasury bonds as seen in the last one month on the back of market reading, some underlying softening of demand is also building especially in the housing segment. This has given some space, as can be seen in the recent commentary from some of the Fed members which indicates that they think 75 bp hike itself to be large enough and indeed it is!

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More than the quantum, one should perhaps start looking at the peak of the hiking cycle. Also with mid-term polls later this year, we are of the view that they will continue to ease the cuts as has been the approach so far rather than one sudden large cut to reach hiking cycle peak.

Market expectations are for a peak by December 2022 – March 2023 and a reversal or rate cut next year when perhaps inflation will peak out and growth will need some boost.

Recently you launched multi-cap fund. So what is the strategy behind launching this fund, what is its relevance in the current investment environment, and what is the basis of this fund?

After the success of our small-cap fund where we delivered one of the best returns in the market over the last 5 years, we attracted a large pool of investors who are comfortable with our investing approach and data objectivity. We sense that given the volatility of small-cap fund, investors can only allocate a limited sum in the product and are more comfortable with a multi-cap strategy which can give more stable returns.

We think this is the best time for our multi-cap strategy as we have seen capital allocated when there are more doubts, which always gives the best return. Our small-cap started its journey during demonetisation-related disruption and has had the best run.

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