Investment Advisor:

Reliance Asset Management (Singapore) Pte. Ltd.

Portfolio Manager:

Dhawal Mehta


The summer monsoon season proved to be very optimistic and India is forecasting record crops this year that may dampen inflation. What steps is the Reserve Bank of India (RBI) conducting in order to keep inflation within reasonable limits?

We agree that a favourable monsoon should ease food inflation, which in turn will lower the headline inflation number. Rising inflation has been a legitimate worry for the central bank. Currently there are reasons to be optimistic that inflation will ease more meaningfully, and we expect the RBI to be nearing a pause in its monetary tightening which to us was well timed.

RBI so far has moved well proactively and has been able to manage the fine balance between growth and inflation. The Central bank has cumulatively hiked policy rates by 275bps beginning with the first increase in March, as it moved to normalise the monetary setting following a successful and aggressive easing to soften the hit from the global credit crisis. The next policy meeting is scheduled for Nov 2 where we expect RBI to maintain a status quo or at best announce a 25 bps hike before pausing for the current cycle.


A lot of people talk about asset bubbles in Asia including the World Bank? What is your take?

Been an inward looking economy, we believe the current resilience shown by the Indian economy is sustainable and hence don’t see a bubble formation. From the equity market perspective there could be short term volatility on the account of FII flows reacting to global sentiments and interest rate/currency movements.


How could you characterize India in terms of foreign trade and how deeply is India dependent on FDI?

While India’s share in global trade has been rising, it is still amongst the lowest within its peer group. India’s exports-to-GDP ratio rose to just 20.3% in 2009, up from 6.5% in 1980. On the export front India remains more focused on services than manufacturing. Over the past 19 years (since the start of India’s reforms), India’s services sector growth has averaged 8.2% a year compared with 7% for manufacturing and 3% for agriculture.)

India is not amongst big recipients of FDI, in 2009-10 total inbound FDI was at USD32bn. As India opens up more sectors for foreign investments we expect the quantum to gradually rise in the coming years.


The record initial public offering (IPO) of the world's biggest coal miner, Coal India, attracted bids that exceeded the combined GDP of Latvia and Iceland. The government intends to cut the deficit as well as to support welfare programs. What do you think are the most critical areas or issues on which the government should concentrate?

The Indian government has committed itself in maintaining the fiscal deficit and the trend so far is positive. Maintaining this trend and improving the governance levels to us should be the top priorities for the government. The Federal government’s fiscal deficit is expected to decline from 6.6% of GDP in 2009- 10 to 5.5% of GDP in 2010-11 and around 5.0% of GDP in 2011-12.


With India’s increasing population and rising energy demands talks about India’s green future are not completely neglected by policy makers. What do you think is the importance of this sector in the economic future of India?

As there is a huge supply of thermal power plants in the country, there has been a need to augment the renewable energy base from the environment point of view. For the same, the Government of India and various States have provided a number of benefits for the development of the renewable sector like tax incentives, preferential tariffs, etc. Recently the government introduced tradable Renewable Energy Certificates, which essentially paves the way for enforcing the Renewable Power Obligations (RPOs) of state electricity boards. Failure to comply with RPO will lead to penalties and hence we believe the renewable energy space in India has a bright future. Both private and government bodies have lined up aggressive plans to increase their Renewable Energy footprint.


Decoupling theory is based on the presumption that emerging markets can sustain the recession, without being dragged down by the slump in developed markets. How do you perceive this theory and what do you think has proved to be the reality?

Local demand and growth prospects in India are broadly decoupled versus the developed economies. However the same is not true for emerging economies which are predominately export dependent.  Also while demand is local, countries like India are dependent on foreign flows (FII+FDI+Debt) to fund their capex and infrastructure growth and hence are indirectly linked to global fortunes to a certain degree.


Some analysts suppose that the BRIC countries would enter a bear market in the near future. What is your perception and where do you see the Indian market in next 12 months?

India is amongst the best performing markets YTD, while better corporate performance and improved acceleration in local demand has been the key factors for this performance, FII inflows have been a key liquidity driver. Going ahead while domestic performance will remain strong much of the equity market performance will depend on the trend on FII flows.


WIOF India Performance Fund – Market Commentary 3Q 2010

The Indian economy has posted yet another quarter of strong growth, with April-June real GDP rising by 8.8% y-o-y. This compares with 8.6% in the prior quarter and 6.5% in the quarter ending December 2009. The main support to growth came from the non-farm sector (9.9% y-o-y) and agricultural sector growth also showed some improvement (2.8% y-o-y). Within the non-farm sector, industrial sector growth slowed relative to the last quarter and service sector rose by 9.4% in Q2, up from 8.5% in Q1.

While Indian markets continue to outperform on the back of liquidity, we are increasingly becoming uneasy over its sustainability. Retail and speculative activity locally is on the rise and is reflected in the continued small cap outperformance. While the liquidity driven momentum can continue much longer, considering the absolute return mandate of the fund, capital protection is a key priority for us than chasing returns. We have now very clearly adopted a stance of protecting the gains made so far than getting carried away in the momentum.

During the quarter we have aggressively booked profits across the board and moved towards higher cash holding with a view of using cash as a natural hedge. We started the quarter from at 86% invested and with gradual selling has resulted in September ending long exposure at only 61.2%. In the wake of increased volatility we also consciously reduced exposure in high beta names. Portfolio beta at the end of September stands at just 0.64.

Going ahead we believe that the current market move up can continue for some time, depending solely on FII inflows. Any reversal in flows will give little time to react and hence one has to be proactive in booking profits. Also both primary and secondary markets issue supply is expected to increase significantly and this will absorb most of the incremental liquidity. In October we expect an IPO pipeline of over USD4.5bn (Coal India USD3.2bn) and at least another USD1bn of secondary issue. While the current high cash and low beta of the portfolio is affecting near term performance we believe it is prudent to be conservative in current volatile times and are happy in not trying to time the markets till the last minute.


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