Mumbai: Terming demonetisation as a big bold step that will change the “use of cash” culture, Reliance Capital chief investment strategist Madhusudan Kela said on Tuesday the government is in a “sweet spot” in terms of fiscal situation and has space to roll out stimulus in the Budget for FY18.
In an interview to BTVi, Kela said while the demonetisation is a “big bold” measure by the government, the recovery will be gradual in nature.
“The government was aware of short-term pain of demonetization. The pain is extremely hard across sectors for now. There are large concerns on the employment front,” he said.
However, the government is in a “sweet spot” with regards to fiscal situation. Now, the government has space to introduce a stimulus, he said on his expectation from the Budget for FY18.
While the note ban has hurt the economy especially the informal sector that employs bulk of India’s 500-million workforce, Kela said Government investment especially capital expenditure is key to drive jobs growth.
Prime Minister Narendra Modi’s historic announcement for scrapping old Rs 500 and Rs 1,000 notes from November 9 has crimped consumption and slowed economic activity. While RBI has lowered its growth projection to 7.1 per cent for FY17 from 7.6 per cent estimated earlier, some private analysts see growth slowing by 1-2 percentage points.
Kela expects the impact of demonetisation on the economy and India Inc’s earnings for two quarters. However, the note ban will change the “use of cash” culture.
A delay in recovery from the demonetisation process coupled with geo-political concerns could hit market sentiment, he warned.
After the demonetisation drive, Kela expects equities emerging as an attractive asset as traditional instruments are losing sheen among Indian households.
“We have seen higher domestic inflows into markets. Equities have not given returns over the last two years. But markets are poised to give strong returns going forward,” he said.
As consumption stocks were hammered down following the demonetisation drive, Kela said he will be “extremely selective” on consumption universe.
“We are not in a tearing hurry to buy into the consumption theme. Select consumption pockets will take longer to recover than others,” he said.
Digital disruption will not impact banks significantly in short-term although there are some bottom-up opportunities in select banks, he opined.
Crude oil price movement is another crucial factor for India, he said referring to the OPEC and non-Opec countries decision to clip output to revive prices. “The government may consider excise cut if fuel prices continue to rise,” he said.
“I do not read too much into crude prices if it stays at current level,” he said but added he will stay away from investing in Indian oil marketing companies—IOC, HPCL and BPCL—at the moment.
There is a case to buy into select infrastructure, commodities and NBFCs, he said referring to the pick-up in capex cycle, rise in commodity prices and new opportunities for non-bank finance companies.
Select NBFCs are available at attractive valuations, he said as some of the NBFCs may step in to make up for the funding gap of MSMEs created after the cash crunch.
The market guru also said he will be selective on technology stocks as some of the midcap IT stocks are gaining traction. The Rupee weakness is a beneficial tailwind for IT, he said.