Uday Kotak,executive vice-chairman & managing director, Kotak Mahindra Bank, says a combination of fiscal deficit and monetary policy play will determine future market movement. Ahead of the three-day Kotak Annual Global Investor Conference that begins today, Kotak spoke to Udayan Mukherjee of CNBC TV18. Edited excerpts:What is your sense of the equity markets in 2013, given that 2012 was surprisingly good?
One has to see how the combination of fiscal deficit and the monetary policy plays together. Europe has taken steps like gradual austerity and easy monetary policy. India is finally moving towards fiscal tightening.
But this has to be done gradually because if it happens too fast, it can affect growth. At the same time, one has to watch how the monetary policy pans out, because unlike Europe, India also lives with high inflation.
Therefore, the challenge is how to ease monetary policy when the fiscal deifict is correcting gradually and handling inflation. How markets will behave depends on how the policy responds to these challenges.
Will fiscal adjustment come at a heavy price of seeing tepid growth?
When you tighten the fiscal deficit, it obviously has an implication on short-term growth, while the long- term economy gets healthier. So that's a tricky one, specially when you are one year away from elections.
The key issue is how do we handle monetary policy when you have a large current account deficit and high inflation.
If you were in the shoes of the policy makers, how would you play it?
The policy makers may have to take a risk on at least one parameter - either inflation or growth. I think fiscal deficit containment has to be gradual.
What I would like to see is a more moderated improvement in the fiscal deficit.
Has global investor perception on India improved dramatically from the pre-September period, as you begin your annual conference today?
We have got a very good response, as around 500 participants from various institutions in India as well as overseas are attending the conference.
There is an air of expectation that India is finally moving on a more positive track on the policy front. Corporate interest in meeting investors is at a record high. Over three days, 4,000-5,000 meetings will take place.
In 2012, India got $24 billion foreign inflows which surprised many people. This year has started on an even better note. Do you expect 2013 to be a bigger year in terms of liquidity flows?
Global liquidity is easy. The sense from Davos is that there is relief and no imminent worry of a crisis. Interest rates around the world are low, so liquidity will flow where it sees opportunity.
The issue from an Indian point of view is how do you balance fisc tightening, handling inflation therefore monetary policy while at the same time give growth to investors.
It’s a very tough combination to handle. But if we can make a reasonable progress on this, money will come.
India's current account is an issue and trade deficit numbers indicate that we have a run rate of $240-250 billion of trade deficit in a year. Therefore, portfolio flows are no longer just welcome, they are necessary.
How much of these flows will get into the secondary market like it did in 2012, and how much of it will get soaked by issuance of fresh paper. We have seen a lot of this already at the start of the year.
Divide the issue of paper into three parts. First, government companies - they will have a reasonable flow of that paper even next year, if we have a handle on our fiscal deficit.
Second, real sector companies, particularly those in the infrastructure sector. Due to high level of debt, the equity values at which many of these companies are trading are very thin; so most of the promoters will find it difficult to issue equity at this valuation and keep reasonable ownership of their companies.
Third, the banking and financial institutions from where we recently saw a lot of paper coming in and more will come in.
I think currently investors are more comfortable with this paper and there will be a reasonable supply of such paper in 2013.
Do you think banks and other financial intermediaries will be able to profitably deploy the funds they are raising? So far, loan growth is quite tepid and investment plans have not yet started picking up. Will we see a turnaround in the investment climate?
Right now, some of the banks may need to raise capital, which will give a lifeline to many leveraged companies. So, some banks may raise capital to provide a breather for the