Earnings disappointment and Chinese stimulus has seen foreign investors taking out money from India. But Sankaran Naren is also worried about investors’ overenthusiasm in the derivatives market. He tells FE that the RBI is unlikely to cut rates in December if growth rates don’t go down materially. Excerpts:
After a wonderful run of almost five years, we have seen some correction in recent weeks. What is your assessment of the market at this juncture?
Given the high market valuations, we have been tempering investor expectations for a while now. So, you had some euphoria, and on top of that, there was a fair amount of IPO activity, accelerating fundraising. Additionally, there was a situation where FIIs wanted to sell in India to invest in China. The combination of these factors led to this outcome. If you look at it, the biggest reason was what China did with its stimulus. FIIs were significantly underinvested in China; they assumed China wasn’t a place to invest for the next 5 to 10 years. Valuation-wise, China was at a 9 P/E, but people were hesitant to invest due to China’s deep structural problems. However, when the stimulus was announced, most hedge funds and foreign investors were caught off guard. They saw India as the best place where valuations were high, making it easier to sell in the Indian market. They could execute their sell trades here, which might not have been possible in some other markets, so they went ahead and executed those sell trades.
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If there is a correction, do you see a prolonged one or a quick sharp fall before recovery?
The challenge is that if there were a fundamental problem along with high valuations, it would be easy to say what might happen next. Today, India doesn’t have any fundamental problems, but markets are richly valued, and domestic retail sentiment is a problem. A valuation and sentiment problem can mean that high valuations can last for an extended period. We aim to reduce investor expectations, encouraging people to moderate their expectations and invest across asset classes, not just take on risk with equities. Are valuations cheap today? I think, aside from banks, where valuations are reasonable, most other sectors are still not cheap.
Had the markets already reached a level where things had become cheap,
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