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Liquidity very serious issue for FPIs, not taxes or surcharges: Raj Bhatt, Elara Capital

, ET Bureau|
Jul 23, 2019, 08.00 AM IST
Raj Bhatt-Elara Capital-1200


  • Govt needs to create a special situation fund of Rs 5 lakh cr.
  • Foreign investors are very happy with the current government.
  • Govt needs to take all the toxic assets out of the system.
Taxes or surcharges are not an issue for FPIs. But liquidity crises and poor confidence in the market which led to a major slowdown are worrying them, said Raj Bhatt, CEO, Elara Capital, an investment bank. The government needs to announce creation of a special situation fund of a minimum Rs 5 lakh crore through sovereign bonds or by printing money like how the US and some European countries did in 2008-09 crises, he told Rajesh Mascarenhas. Edited excerpts:

What is your view on the Indian economy compared to other emerging countries?
The Indian economy is going through some industry-specific problems like liquidity and poor confidence in market leading to a major slowdown which nobody wants to admit. Unless the government does something drastic like US’s Troubled Asset Relief Program (TARP) scheme. The US government created a TARP of $400-$500 billion as the banks were not lending and there was no trust from investors and analyst community. Similarly, in the Indian market, there is no trust in NBFCs and as a result we see defaults happening. The government needs to take all the toxic assets out of the system so that the banks don’t have to worry about the markto-market every quarter. I hope they announce a scheme for liquidity.

How long will it take for a resolution to the liquidity crisis?
As I mentioned before, the government has to create a special situation fund of minimum rA 5 lakh crore, maybe through sovereign bonds. Dollars entering the Indian market will help as long as we can support this kind of borrowing because we have $400-500 billion reserves. US and some of the European countries printed money during the crises in 2008-09. I hope the government should come up with a similar announcement as liquidity is a very serious issue with the economy going through a major crisis.

What are foreign investors saying about the increase in CESS and tax in budget 2019?
Foreign investors are very happy with the current government. With Modi being in power they foresee optimism going ahead. Taxes or surcharges are not a big issue for FPIs. But liquidity crises and poor confidence in the market are worrying them. Most of the FPIs are chasing yields and all are buying assets that are secured to give a positive yields. A country like India is very rare as it is big in size.

Do you think corporate governance issues also added to the negative sentiment? How do FIIs see India in terms of corporate governance?
FIIs don’t invest in small companies because they don’t trust their numbers. We have been through this crisis of corporate governance. For the last year and a half, only the benchmark indices are rising because of passive money from ETFs. The ETFs which started 8-10 years ago now have roughly 50% of the FPIs investment.

How long will this correction continue and which are the sectors that look promising in India?
I am very positive that the government will come out with some announcement and surprise everyone. Rate cuts will take place — after which we expect the market to rally. If the government plays its cards right, we will surely see a good wave because of liquidity and extra lending in infrastructure and metals. I am bullish on infrastructure.

What’s your view on the government’s plan to increase the free float from 25% to 35%?
This free float could create unnecessary pressure on promoters to sell their shares. It should be more of a recommendation that people should dilute their stake but should not be made mandatory.

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FPIs cut bearish bets, but remain wary

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