Indian mkts poised for boost as RBI cuts and global flows align

Ajay Bagga, Market Expert, says the issue is the US, all the chaotic policy turbulence which has hit the markets as well, that gets resolved to some extent over the next two-three months. What will not get resolved is the US debt, that will stay, so we are not seeing US yields coming down sharply. We are not seeing the Fed cutting rates, but we are seeing the RBI cutting and since this week the chatter on the street more is that 50 basis point rate cut coming from the RBI in June. If that comes, it is a big leg up for the Indian economy.

ET Now: I want you get your sectoral view. Just like Snehi mentioned earlier we are at the end of the earning season, given how numbers have been so far, which sectoral plays are looking more attractive to you.


Ajay Bagga: In terms of institutional overweight, financials are a clear winner. It remains underweight. Most of the institutional players are underweight on it. Then, again the domestic focused sectors are doing better and even the funds are positioned overweight on them, be it consumer durables, be it auto, be it construction and industrials, those are some of the sectors that are seeing an overweight. We must recognise that our markets have gone through the ringer. They have seen a four-day kinetic action with a hostile neighbour and come out well from that.

All the global sentiment souring which has hit our markets, despite that we have seen a lot of resilience in our markets. My personal thesis is that Trump will settle at 10% universal tariffs globally in the next two to three weeks and that will lead to a big upsurge in the risk sentiment and our markets are well positioned.

What is showing up and I do not know if Rajesh has also studied it, our markets have become more volatile than comparable Asian markets. So, we have fallen more and we have gained more across this week than what our Asian peers have shown on the same news. So, Indian markets are showing more volatility though the VIX is not showing that, but the price action is kind of reflecting that. So, I would say resilient market shaping up for an up move and buy on dips very much.

ET Now: I want to get a sense of everything that we are seeing on the US front. First, there is a divergence that is clearly being seen between the US bond yields as well as where the dollar index is headed. On the other hand, you have the Moody's downgrade coming in. Despite that, you have Donald Trump that has barely been able to pass his tax bill that adds on to US debt. What are you making of all of these developments? And how is this going to have an impact on the overall world because like we know, it is popularly said, when the US sneezes, the whole world catches a cold. When is the US going to sneeze when it comes to their debt levels?

Ajay Bagga: Yes, that is a very good analysis. Normally, if rates go up, the currency should have gone up, rather we saw the dollar going down. So, rates were going up more out of an alarm at the Trump tax and spending bill that it will add nearly $5 trillion more over the next 10 years to the US debt and deficit. Already, the deficit is running very high and the tariffs are really not working. Though they celebrated $16 billion coming in April, but they were running at $8 billion already. So, going from about 3% tariffs to a weighted average of 19% and getting just a doubling of the tariff as against a target of 600 billion, you are running at about 180 to 200 billion right now.

So, the tariffs will not make up for the tax cut revenues. When the economy is doing fairly okay, when there is no need for a tax cut, Trump has brought in a tax cut and more for the wealthier sections and the corporates and cutting back spending on the welfare part, so the Democrats are saying that nearly a million jobs will go based on this bill. We have no idea of that. What we are clear is, one, the world is very afraid of tariffs and Trump will bring in a 10% and settle it for a majority of countries, so there is a relief rally brewing.

Second, the structural issue with US debt and the fiscal deficit stays and there are no easy answers to that. So, it will keep working. For now, 80% of global trade is still denominated in dollars. It is still the reserve currency for a large portion of the global reserves, so that will stay till it stops working. So, we have to wait that out. I am not calling an early end to the exorbitant privilege that the US dollar is enjoying, that continues for another 10 years if I may say that.

The third big part is $33 trillion are sitting in the US market invested by global investors in bonds and stocks. A small portion of that will start moving out and where does it go? It will go to Europe. It will go to Japan. It will come to emerging markets and India within the emerging markets we will get our good 7-8% share of the emerging market flows. So, again, that is another trend that will benefit us going ahead. And fourth is our domestic strength overall, which we have spoken a lot already, that is a well-known thesis.

Our issue is the US, all the chaotic policy turbulence which has hit the markets as well, that gets resolved to some extent over the next two-three months. What will not get resolved is the US debt, that will stay, so we are not seeing US yields coming down sharply. We are not seeing the Fed cutting rates, but we are seeing the RBI cutting and since this week the chatter on the street more is that 50 basis point rate cut coming from the RBI in June. If that comes, it is a big leg up for the Indian economy.

Again, it will be a big monetary stimulus, already 8 lakh crores RBI has put in terms of liquidity. They are about to give two-and-a-half to three lakh crore dividend to the government in the next week or 10 days, that is again a liquidity infusion into the market. So, markets are setting up for a leg up in the Indian markets at least.

ET Now: I want to get your sense on the FII behaviour and the FII activities that we have seen over the course of the week, particularly on 20th of this month, 10,000 crores of selling is something that we have seen. This is an amount that we do not see very frequently. Does this indicate that the FIIs and the global players are now losing confidence in the Indian securities or do you believe that this is just a one-time blip and the confidence is still intact?

Ajay Bagga: Confidence is there. We saw 10,000 going out. Next day, we saw a positive of 2,000, very next day minus 5,000 again. So, it is more the screaming that is happening in the bond market and especially the longer-dated Japanese bonds. What that means is that the carry trade becomes unprofitable. If the yen is appreciating and also the JGB yields are going up, the Japanese government bond yields are going up, then money starts coming back home. So, it could be part of that, that we saw in terms of the outflows.

The two big days of 10,000 and 5,000, but middle of that we did see a 2,000 crore net inflow. On Friday, we saw some amount of short covering happening and we saw the rupee strengthen as well, which could be a pointer that Friday FII flows were better. So, too early to call that.

The trend is towards emerging markets being beneficiaries of the dollar weakness. We see the DXY, dollar index, going down from 99, another 5% to 10% over the next six months is what we are looking out for. I think that will happen and you could see India as a beneficiary of the FII flows turning around. So, I would not call time on FII inflows right now based on the previous week's performance and we will wait and see. But yes, it is a problematic phase when the Japanese rates go up or the yen appreciates, then the carry trade on the margin starts getting impacted.