00:00 Hello and welcome to BQ Prime. I'm in conversation with Sahil Kapoor from DSP Mutual Fund. Hi
00:06 Sahil, thank you so much for taking time out for us today. So, you know, I'm going to begin
00:11 with something that's top of everybody's mind today, oil prices. We've already touched 90.
00:18 I do want to understand what's the impact for the economy going forward, FX, CAD, growth
00:27 and of course inflation. So what we've seen historically is that if oil remains above
00:33 90 for at least a three month period, it begins to make a difference to our international
00:38 situation, external situation. Our imports rise quite a lot in dollar terms and it begins
00:44 to hurt. And historically when we've seen oil between let's say 95 and 100 dollars for
00:52 let's say a six month period, usually we've seen at least 50 to 100 basis points increase
00:58 in our six month CPI, which is quite sizable. So that is something that we should be cognizant
01:05 of how oil prices move. Second is our, of course, our international, external situation,
01:10 right, our trade deficit that goes up as well. And I think these two are the bigger vulnerabilities
01:16 that we have. But over time they have become smaller because GDP size has grown. But you
01:21 could say that 90 to 95 dollar crude oil price is sort of a Lakshman Rekha beyond which I
01:28 think these troubles begins to brew and where it is right now. But my own personal sense
01:34 is that oil prices may not remain this high. The underlying demand is weakening, although
01:40 there are a number of supply cuts which are in place right now, which are taking care
01:44 of that excess weakness in demand. But one thing is very clear last four or five days
01:49 ago, Saudi Aramco highlighted that they want to do a $50 billion offering of their stock.
01:57 And we've seen that historically the company has tried to, you know, play around with the
02:02 oil price when they want to offload their equity. This I think would also be at that
02:06 phase where they want to keep supplies tight so that they get a good price for their offering.
02:12 All right. So you know, while we're talking about this downside risk, we cannot ignore
02:17 the risks from the southwest monsoons. Just considering the volatility we've seen and
02:23 efficient rainfalls in August, September, of course, remains unclear at this juncture.
02:28 So what's it looking like? So historically, what we've seen is the data, as far as I know,
02:34 is if by mid of August, you have about 600 mm of rainfall, usually you don't see a big
02:41 hit to our, you know, crop production levels. And we had that number this time. And our
02:46 numbers were fine in terms of sowing. They have deteriorated, you know, somewhat in last
02:51 two weeks and reservoir levels have also come down slightly below long term average. But
02:56 I don't think right now they are alarming. If we get a revival, which is what IMD is
03:02 saying in September, then probably we'll, you know, scrape through this period and there
03:07 will not be a very large impact. But if you see a deficit of, let's say, 10-15% in overall
03:13 rainfall, then possibly agri GDP can get hit. We are close to 4-4.5% growth for agri GDP
03:20 right now. Historically, it slips below 2% when this kind of a hit occurs. So there is
03:25 definitely a reason to look at this data. But present data is not too bad. I think we
03:32 are in okay environment. If this spans out, let's say a 6-7% deficit also or 8%, I think
03:40 we'll be okay. Right. And at this juncture, the narrative is that inflation to the bump
03:46 up that we have seen is largely transient. Should the southwest monsoons recede while
03:54 being deficient? What's the outlook there? So largely, I think it will remain transient
03:59 in terms of the overall impact because one clear risk from a lower monsoon is horticulture
04:06 production. I think those numbers are still okay. We had a very large bump up over the
04:10 last 10-15 years. So I don't think we are going to slip significantly. But yes, these
04:15 month on month variations in price, they can continue. Second thing is that India is a
04:21 very price sensitive market in terms of inflation also. So what we've seen is that if you have
04:25 a 2-3 month period where, let's say, vegetable prices go up through the roof, what tomato
04:31 did two months ago, in those periods, your disposable income in the weaker sections of
04:38 the economy, they get hit quite a lot. So it comes and hits your demand significantly,
04:44 but only for that period of time. So I think it is an important risk that we run for the
04:49 rest of the year. But as I said, the numbers are not so bad right now in terms of reservoir
04:54 levels or the overall crop production levels. So I think we should be able to see through
05:00 this risk. Second thing is that core inflation is still falling. So it's below 5% now or
05:06 about 5% now. So which is a source of comfort. Second and thirdly, probably our top line
05:12 numbers are falling. Our nominal growth is slowing. Even tax growth is now slowing. So
05:17 it tells you that the GDP deflator or the inflation, core inflation is not very strong.
05:24 The trend is not very high. So these transient factors will not be able to increase it further.
05:29 So you have a falling mean and you have maybe these transient factors play in between.
05:35 So, you know, the first risk that you touched upon. Now, at the current juncture, we're
05:41 at a crucial time because, you know, we're talking about a season like the festive season.
05:47 And so far, it does not, it seems to have started off on a good note. But how much of
05:53 a dent do you think inflation can make in the current scenario?
05:58 So from a longer term perspective, if you look at let's say last past 10-15 festive
06:02 seasons, I think we are in a very comfortable environment as far as inflation is concerned.
06:08 It's not a very inflationary kind of an environment. Core numbers are fine. So I don't think it
06:13 will make a significant difference. It's rather I think it's quite positive in that sense
06:18 that inflation is not so high in comparison to a few seasons that we've seen in the last
06:23 few years. So I would take it more as an enabler in terms of the overall demand environment
06:29 rather than being a risk.
06:32 Another aspect like another space where there's been quite some activity in recent days has
06:37 been the rupee. And there are expectations that we could see a little bit of weakening
06:44 even from here on. So what are your expectations?
06:47 Largely, I think it is a function of, you know, rupee not doing anything. In the last
06:51 12 months, rupee has been in a very, very narrow range, right? Maybe of two and a half
06:55 rupees odd. And I think largely the expectation is stemming from the strength that we've seen
07:02 in the dollar index and which is hitting back on the rupee. But when you look at the factors,
07:06 one that inflation differentials for India is still very stable and not slipping on that.
07:12 Foreign flows are very stable. FI flows were patchy last year. I think this year they've
07:16 been stable. FDI flows which had gone down, I think they are now, you know, more or less
07:22 stabilizing. Our trade deficit, which had gone to 25, 27 billion dollars a month is
07:26 now below 20 and, you know, hovering between 80 and 20. So I don't see there are many red
07:31 flags for the rupee. It could there could be short term, you know, volatility based
07:35 on flows, sentiments, etc. But I think largely the range will hold. Maybe we'll slip up by
07:41 a rupee or so go up, go back to, let's say, 83, half 84, which are new lows. But I don't
07:46 think a large move could unfold given these numbers. If they remain stable, I think rupee
07:51 will continue to be in a broad range. Got it. So, you know, to conclude, what are high
07:56 frequency indicators broadly looking like at this point? So most high frequency indicators
08:02 that are important right now, most of them are maybe plateauing. For example, every month
08:09 you're seeing GST growth slipping by about 50 basis points or so from 13 and a half to
08:14 13, 12 and a half. Now it's come to 11, 11 and a half. So sort of a deflationary, disinflationary
08:21 environment is setting in in most of these numbers. Even one more data point, I'll tell
08:25 you that out of BSE 500 companies, now I think one third of the universe is seeing a decline
08:32 in top line sales growth. So there is a disinflationary trend overall. But when you look at sentiment
08:37 indicators like a PMI, they continue to rule at lifetime highs. So business sentiment is
08:42 strong, but I think the big base buildup or the very high YOY numbers that we saw last
08:49 year, they are now coming back to more normal levels gradually, because your WPI is negative,
08:54 your commodity prices have come off. So on the whole, I think there is a mixed picture.
08:59 The picture is one sentiment remains strong, B, the numbers are slowing down to more normal
09:05 levels, which is where they should be. Actually, I do want to ask you for your view on long
09:10 dated securities at this point, does it still look like a good space to invest in? So we
09:16 think that all the negatives are priced in. Globally, most markets are looking for let's
09:23 say the last hike or they are looking for a cut in next six months or seven months,
09:28 etc. In case of Indian yields, I don't think any expectation is built right now. Secondly,
09:33 we had these intermittent shocks of inflation and other which has probably widened the 10
09:39 year minus repo spread. It's had about 75 basis points now. And if you go back in history,
09:44 when the cycle is already off its peak, which means that central bank has stopped raising
09:49 rates. This is a good spread to have 75 basis points. So we believe that playing duration
09:54 or buying longer dated securities is a good trade today. And it could maybe slip back
10:00 below 7% in terms of the 10 year as and when this disinflation cycle plays out. So both
10:06 of them I think will go together. Got it. Thank you so much for taking time out for
10:10 us today. Stay tuned to BQ prime.
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