Daily Voice | RBI may not be as aggressive as other global central banks with interest rate hikes, says Mirae Asset MF#39;s Head of Research

Market Outlook
Harshad Borawake of Mirae Asset Mutual Fund

Harshad Borawake of Mirae Asset Mutual Fund

While one can never be certain on what market has priced in, Mirae Asset Mutual Fund’s Harshad Borawake believes that market has factored in the peaking of inflation.

In an interaction with Moneycontrol, Borawake, the Head of Research & Fund Manager, said “Given that the headline CPI inflation rate is still above the RBI target range of 2-6 percent, RBI may continue to raise repo rate.”

However, in the context of cooling of commodity prices as well as normal monsoons so far, RBI may not be as aggressive as other global central banks, he feels. Edited excerpts:

Do you think the US Federal Reserve delivered on expected lines?

The 75 bps rate hike to the range of 2.5 percent-2.75 percent was largely on expected lines, post the recent 40 years high inflation print of 9.1 percent and also with the labour market remaining tight.

Chairman Jerome Powell, acknowledged growth slowdown as well and mentioned that monetary policy acts with a lag and there is a significant tightening already on the pipeline.

As for commodity prices going down, it may help gradually to lower the inflation in coming months. Fed will remain data dependent, and unlike past the path ahead is likely to be less straightforward.

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Do you expect significant deterioration in global growth in FY23 given the expected slowdown in US and Europe?

If you look at the current global set up, Russia-Ukraine conflict has created some strain on the global supply chain, while high energy and food prices have resulted in higher inflation.

How long this situation will persist can only be guessed, but in the interim it will have some impact on the growth. However, unlike prior slowdowns, we believe this may not be prolonged as the private sector balance sheets are in a good shape. So, once inflation settles down it should be relatively easy to revive growth ahead.

Capital goods is one of the sectors that took lead in the market recovery especially from June lows. Are you bullish on the space and what is your pecking order for stocks?

While the government continued to spend on infrastructure in the last few years, private capex was not substantial. Now, as the economy normalizes and industry utilization levels improve, we expect the private capex to come back and it should benefit capital goods sector. Government efforts like PLI (production linked incentive) schemes should also help.

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Private sector balance sheet is quite strong for capex revival as and when it starts with debt / equity of ~0.6x for top 500 companies. In the last few fortnights, credit growth has surpassed the deposit growth, which is positive. While, we remain constructive on the space, as you are aware, we cannot comment on the specific stocks.

Do you expect significant fall in inflation print in last quarter of CY22? If yes, do you feel that the market already started pricing in this news?

We believe that the domestic inflation could have peaked out given the fall in the commodity prices. Normal monsoons so far should ease pressure on food prices, which is a meaningful component of the CPI Index.

While, one can never be certain on what market has priced in, we believe market has factored in the peaking of inflation.

Considering the fall in commodity prices including oil, what are your broad expectations from the RBI’s policy meeting next month?

Given that the headline CPI inflation rate is still above the RBI’s target range of 2-6 percent, the central bank may continue to raise repo rate. However, in the context of cooling of commodity prices as well as normal monsoons so far, RBI may not be as aggressive as other global central banks.

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Meanwhile the oil has certainly eased, but INR continues to remain under pressure. And if RBI does not track global central banks in the quantum of rate rise, then the pressure on the currency will only mount. While RBI has been using forex reserves to prevent INR volatility, it cannot use them to perpetuity. Hence, both, commodity prices and outlook of global central banks matter for RBI actions.

Do you think we have still enough opportunities in the power space that already seen significant rally this year?

Power sector had seen a multi-year de-rating which was exacerbated by ESG (environmental, social, governance) related concerns as well. As the economic recovery picks up and ESG concerns start getting addressed, the rising demand will ensure that the under-investments of the past several years gets rectified.

Government has set up ambitious targets on the green energy capacities. Hence, there would be opportunities in this space, subject to valuations.

Mirae Asset recently launched Balanced Advantage Fund NFO which is dependent on price to book & price to earnings valuation. How do you think it will benefit investors amid the ongoing volatility and fears of rising inflation which may have an impact on earnings, eventually hitting the Balance sheet?

We have considered both P/E and P/B, precisely for the reason to factor in both balance sheet (P/B) as well earnings growth (P/E). In the event of market volatility, had we only used earnings approach, it would have become short-term driven. Also, if you look at Nifty50 Index, ~40 percent of the index constituents are valued on P/B basis and to that extent, we wanted to give importance to balance sheet too.

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So, like in 2020, when the businesses were closed, any P/E only model would indicate significant reduction in equity due to lack of earnings. While, in reality it was just a one year cash flow loss and underlying balance sheet and earnings capability was very much there for the companies. Thus, P/B component helps you to factor in such situations and take a more longer term view.

Broadly, we are keeping it simple and use parameters which have better longevity and try not to tweak around it too much. Our endeavour is to give a solution to an investor to better address market volatility through regular rebalancing and at the same time giving continued equity participation.

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