I don’t see inflation as a big worry for India: Sunil Subramaniam of Sundaram Mutual Fund

Sundaram Mutual had climbed a few rungs in terms of assets under management (AMU) with the acquisition of Principal Asset Management Company after successfully weathering the impact of Covid. The fund house now has an average AMU of around ₹40,000 crore in the June quarter.

In an interview with Activity area, Sunil Subramaniam, managing director of Sundaram Mutual Fund, expects India’s long-term growth story to propel the bullish trend in the market. Extract:

What are your prospects for the market?

We are optimistic about the long-term outlook. The government’s financial situation has improved thanks to growing GST collections and the success of 5G airwave auctions. Moreover, corporate earnings in the June quarter were not as bad as expected earlier. The government has already committed 57% of the planned investment expenditure. This will have a multiplier effect on the economy.

With overall capacity utilization at 72%, private sector investment spending will also pick up. The Indian economy is on a reasonably good wicket.

As we all know, liquidity is the engine of the market. About 40% of the float in the stock market is still held by foreign portfolio investors. So what they think of our country and economic growth is key.

Is the recent market correction a wake-up call?

I do not think so. It has more to do with the usual fall of a bull market than leading into a bear market. Earlier, the main concern that led to a huge withdrawal of money from the REIT was the surge in crude oil prices since we import 85% of our needs.

With the recessionary force playing out in developed countries, oil will follow a steady downward trend after the end of winter. Lower oil prices and a recovery in the Indian economy bode well for attracting cash. This is already reflected in Q1 REIT entries.

In addition, the sharp decline in commodity prices was not fully reflected in corporate margins in first quarter results. The benefit of lower input costs will begin to trickle down to the commodity-intensive consumer goods and automotive sectors in this quarter.

In fact, it will give an indication of the next year’s earning potential of these sectors. Overall, India is slowly getting closer to sweet spot and I don’t see any threat in this trip.

Is the US Fed rate hike a major shock to the Indian economy?

This will be a major shock to the global economy. The increase in the interest rate from 1.5% to 8.5-9% is something incredible. The US Fed is determined to fight inflation and I do not rule out further rate hikes. Rising rates will cause a recession much faster because it will kill demand.

The recessionary situation will further lower oil prices. In addition, during a recession, efforts will be made not to cut liquidity in order to find a balance and support growth. This bodes well in an international scenario.

An interest rate hike by the US Fed does not necessarily mean that it will be followed by the RBI. About 48% of our CPI basket is food. Whatever the RBI rate hike has done so far is more to do with the outlook for the currency rather than the fight against inflation per se. I don’t see Indian interest rates rising as fast as America’s, as RBI’s position would be to support growth.

There is no need to worry about domestic inflation, as the good monsoon will naturally lower food prices. Another 10-15 in the CPI consists of oil and transportation, which will ease as crude oil prices decline. Thus, 60% of the CPI is not sensitive to inflation. I don’t see inflation as a big concern for India. The RBI could go into rate pause mode even as the US Fed continues its rate hikes.

Does this mean no more rate hikes by RBI

Not necessarily. RBI rate hikes are currency driven. If the inflation print exceeds six percent, it gives RBI a weapon to fight against the currency. They will use it intelligently to tame the rupee. There is no big concern on inflation for India as much as for the United States. A further rate hike by RBI will be done more to reduce volatility in the currency. Our depreciation of the rupee against the dollar has been much less compared to other emerging market currencies.

Will the global recession affect Indian exports?

Yes, it will. However, the drop in exports will have an impact of 1% on our GDP. In the worst case scenario, India’s GDP growth could fall from 7% to 6%. As the United States slides toward zero percent growth, India’s six percent growth will look very good. In the land of the blind, the one-eyed man is king.

Do you expect an exit from the REIT as the US Fed prepares for another rate hike?

In my view, more than the US Fed’s rate hike, the rise in the price of oil drove REITs out of the Indian market. The threat of REIT withdrawal from the Indian market is only on paper. Of the $9 trillion in American money that’s been floating around, they said it would be down to $7.2 trillion by next year and today about $8-8.5 trillion is still there.

The outsourcing of investment from India is happening to commodity export markets. With commodity prices falling, we only need this money to come back. India is therefore more attractive than other emerging markets.

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