ML: At what stage would inflation and higher interest rates be worrying factors given the higher high liquidity in the system, rising prices and huge government borrowing?
VS: On inflation the RBI has already started to move the coin around. When he spoke in July, the governor talked about how the primary agenda is growth and we (the RBI) will not do anything until we are sure that growth is well-entrenched. Now he says that we might have to exit our accommodation ahead of the rest of the world because there could be inflationary pressures mainly because we remain supply-constrained. RBI will have to gradually start to hike rates and it could be as early as the current quarter. There could be some non-interest related measures of tightening in this quarter and then the more classic bank rate, repo rate in the first quarter of calendar year 2010.
ML: On the other hand, there could be a lot of money coming from PSU disinvestment and maybe there would be no need to raise rates?
VS: It certainly helps to ease the problem but what I hear we will take the middle-of-the-road approach of raising $4billion-$5 billion a year. But the government can do what China has done in the last five years, which is to think big and act big. I would actually recommend that if you want to raise a big chunk of money, disinvest stakes in Coal India and LIC. When you do that you will be surprised with the kind of appetite. Local retail has always had a strong following of all these PSU offerings as long as they are reasonably priced. But it would be a significant matter for foreign money as well. Forget $4billion-5 billion, we could raise $10 billion or $15 billion in one very large size disinvestment. If we do it in big chunks, we would be surprised with the kind of money flows.
ML: With the markets back in full swing, IPOs are back in vogue. A big burst of IPOs is usually is a contrarian indicator. What is your sense?
VS: Going by the number of pre-IPO research reports which have been flooding into the office in the last one month, it obviously signifies that the trend is picking up. Lot of these are the usual suspects who got left out in the fund-raising last time around are coming now. Most of them are real estate companies who couldn’t raise the money in 2007-08. I think they might find it a little challenging. We don’t lack diversity in terms of the number of listed real estate companies. Now you have got 10 more real estate companies wanting to raise money. I don’t think it is going to be so easy. The PSU offerings, if they are large-sized and reasonably priced will have a large following because there have been reasonably large number of people over the years who have made money by investing in these government offerings. I think there will be an active calendar of offering from the government, which the market can absorb. If we see a lot of these real estate IPOs meet with an extravagant response, then I would start to think about it in terms of being a contrarian indicator.
ML: What is the direction of the market over the short-term, medium-term and long-term?
VS: I think from a medium-long term point of view we are definitely positive. The only issue I see is that the scope for returns have been reduced by the fact that the valuations have already run up quite a bit. Historically, Indian market returns on a rolling basis is 15-16%, which are a shade above the kind of nominal growth rates that we have in line with profit growth. But when you have already run up to a PE multiple of close to 20, you need not just a 15% profit growth, but you also need the PE multiple to remain unchanged over the medium term to realise that 15% CAGR. My sense is that the medium-long term prospects are still good but medium term returns are being compromised by this level of valuation. In the short term our sense is that the market is outside our comfort zone in terms of valuation. It is vulnerable. What will cause it to come down is hard to say. For example, we have seen China fall off almost 20-25% from the peak in August and September for a variety of factors. So it could be anything that could cause a significant pullback.