Crude at $100-120/bbl to ease Indian eco: Macquarie

Seshadri Sen of Macquarie Research, feels that crude will not provide relief to the Indian economy until it goes below USD 110-120 per barrel. He said that the telecom sector will be largely immune to the slow down in the economy and with a one-year view, stock prices of telecom sector will do well.

Excerpts from CNBC-TV18's exclusive interview with Seshadri Sen:

Q: First your thoughts on this clean run, this market has had and what has been the biggest contributing force to this?

A: A combination of politics and oil has contributed to this rally. Oil has come off from USD 143 per barrel to USD 129 and the way it is now, India’s fortunes inexorably linked to oil prices. With regards to politics it’s not just that the UPA survived, but it survived with comfortable majority, both of these have strengthened the markets in last couple of weeks.

Q: What is the view on crude since you said our fortunes are inexorably linked to crude? How are you seeing it proceeding and therefore what kind of legs would you give this rally and how much can it go further?

A: I have a tough enough job as a India’s strategist, I don’t want to predict crude as well but if crude does stay here, the rally or the relief has been enough in crude. Even if crude prices stay where they are right now the Indian economy will be under severe pressure and at some stage the government will have to think of yet another retail price hike.

Until crude drops to the USD 100-110 per barrel it is not going to provide any significant relief to the Indian economy and if it stays above that then expect inflation to stay in double digits at least till the middle of next year and interest rates to push up further. So while there has been sort of relief rally both in crude and the markets, the linkage between India and the crude price is more a step function than a continuous function and the markets maybe surprised by both inflation and interest rates unless crude falls significantly from here.

Q: With regards to telecom, mobile really seems to be struggling- how are you feeling about Telecom as a space and valuations as well?

A: We are very comfortable with telecom. We were expecting the Indian economy to slow down and telecom is one sector which will be largely immune because the spends are so small that pressures like inflation, interest rates etc are not going to affect mobile spends. The roll out and subscriber addition is more dependent on companies rolling out their distribution network and then on demand.

In these times go for sectors where there is acute scarcity and telecom we think still suffers from acute scarcity of product and don’t see problems with telecom from here on.

Q: Are you buyer at current levels in any of these stocks, or would you wait for lower levels, are you confident you will get lower levels? Where exactly are you looking for value?

A: We try to take a one-year view and for telecom a one year view. We are confident that the stock prices will do well whether in the intermediate term prices could fall, it is too difficult to predict and we like to focus on fundamentals and valuations and a one-year view and on that basis telecom looks good.

Q: Macquarie has downgraded the entire banking space - is the key concern there interest rates and how are you reading this entire banking reforms moving faster now?

A: If you see what is on the table as far as banking reforms are concerned; there is a Banking Regulation Act which has fairly cosmetic changes and the only serious one among that is the abolishing of voting rights which is not too serious.

The three key reforms we are looking for in banking sector which would really affect the fundamentals is; one, is if the government agreed to dilute their stake in State owned banks below 51%, if the foreign investment limit in the State owned banks were raised above 20% and if foreign banks were allowed majority stakes or larger stakes in Indian private sector banks. None of these 3 reforms are on the table or even bills pending in parliament.

The only other one is not a bill pending in parliament and could be rushed through is the insurance legislation but that again could lead to some valuation benchmarks and provide some upside. But if you look at the insurance industry is going to benefit the smaller players who have been strapped for capital, the larger players anyway have enough capital and so I am not sure that is a one sided benefit to the large listed players.

The banking sector will very soon start to focus on fundamentals which are worsening at a very rapid pace. There is slower loan growth, worsening asset quality.