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No high hopes from Budget 2019 for equity markets: Adrian Mowat

Finance Ministry should target reduction in the fiscal defic..

Finance Ministry should target reduction in the fiscal deficit as this is the only time the govt can be fiscally prudent says, Adrian Mowat, EM Equity Strategist. Excerpts from the interview with ETNOW.

How was the month of June in isolation in light of the painful under-performance by India? Was the Indian market simply mapping global markets in May and June?

The key issue for G-20 meeting is whether China or the US will reduce trade tensions. Early in May, we had seen escalation in trade tensions as US China harped on at already agreed decisions at global level. Hence, markets saw sharp selling off. Asian markets such as China, Korea, Taiwan were really impacted by these trade disputes. What lies ahead of us is to see how Trump and Xis extended meet in Japan ends. Moreover, I suspect that we will not get a broad statement from the G-20 about an improvement in trade.

In India there is a key event of full budget. What do you think FIIs and global investors should expect from the budget?

Honestly, I dont have high hopes with budget 2019. People have been asking me how we are going to see a stimulus, is this budget going to be good for growth. I would be very surprised if that was the case. The budget is working on election cycle and after a strong victory it tends to get a degree of fiscal prudence, bit of fiscal tightening and so the impact of the budget on growth is usually slight negative. Though we get an offset in but there is a degree of political stability and business investment. Overall, I think the budget is negative for growth but the election result turns out to be positive because it provides a greater number of years of clarity in terms of political policy.

In terms of fiscal deficit, if the slump is about 10 to 15 bps, do you think that investors will take this positively?

This is the only time for the government to be more fiscally prudent. They do not need to be out there stimulating the economy in order to encourage more people to vote for them. Hence, my expectation would be a prudent budget. They should target reduction in the fiscal deficit.

The budget is likely to focus on infrastructure and NBFC issues. What will be your perspective?

Yes, I would imagine the finance minister will discuss both the sectors but remember this is the same administration that has been in government for a period of time. So, a government which focused on infrastructure spending in its previous term, is not likely to change the direction. The issues around NBFCs and PSU banks has been under stress in the Indian financial system for many years. These are difficult issues to address, particularly the use of public funds when you are trying to deal with private or quasi private non-bank financial companies. In my view, this story will be with us for many years to come,

One of the reasons for the growth being slow has been the NBFC issue. Do you really think one needs to solve that to see a rise in growth?

I am of the opinion that it is rational to consider the NBFC issue as the sole reason for impact on economy. When one thinks of monetary policy, it is not just about the RBI, but also about the position of the states financial system. The financial system in India got severely hit by the stress in non-bank finance companies particularly in infrastructure sector. This impacts an economy through the distribution of credit and so addressing that is important, but I do not think there is an easy fix to this. It is going to take time to recapitalise and then rebuild peoples confidence in these different institutions. Moreover, the management structure of the banks is being criticised for bad loans rather than being criticised for not making sufficient loans at this point in time. Besides, the private sector banks in India have no profitable opportunities without really needing to fill the gap that the NBFCs have opened up.

If fiscal prudence is maintained, do you think rates in India will go down further in the next RBI meet?

I anticipate that there is a chance of further rate cuts in India. No follow through was done with higher inflation when the currency had been weak and when the oil prices had been rising. So, this is a good chance that the Reserve Bank has the flexibility to reduce interest rates if that is the only appropriate option left in order to stimulate the economy.

In H1, India has under performed the rest of the world, what do you think this is the reason for this slump and what should one expect tactically in H2?

Well, it is a dangerous point for analysis. However, India has been a significant outperformed in the final quarter of 2018. It did not have the recovery trade that you saw in many markets in the first quarter of this yRead More – Source
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