‘Markets will continue to see huge volatility’

The stock market has turned wildly volatile of late, buffeted by the rupee and hapless economic data. The NSEL issue has also taken its toll on investor morale. We catch up with Dilip Bhat, Joint Managing Director, Prabhudas Lilladher, to gauge the market mood.

What is the mood among retail investors now, are they buying stocks?

Retail investors have been passive spectators for some time now and rightly so. The heavy redemption that we saw in mutual funds in the last one year proved that they were right in their decision as they kept on withdrawing money at every rise, not withstanding the record FII inflows, as the subsequent turmoil that rocked the markets would have eroded the value of their investments considerably. Markets have not enjoyed the confidence of retail investors for the past couple of years and the recent volatility of unimaginable proportions has dented their confidence significantly

Were your investors also caught in the NSEL imbroglio?

We took a conscious decision not to participate in this particular product despite our traditional expertise on arbitrage and yield products as we were never convinced that it would be in the interest of our investors. While we did give up on substantial income over the years, I think we did the right thing by resisting the temptation of earning quick money. There were, of course, repeated discussions with our partners and large clients and every time we pointed out the risks. At times we did lose a few clients to competition but we were firm about our decision not to participate in this product.

What are the lessons for investors from this episode?

Few important lessons emerging from the NSEL crisis are: Investors must seek complete clarity on products offering returns higher than similar products in the market, whether it is because of some loophole or gap in the framework of laws under which the product is regulated.

Investors must seek clear details of the trade guarantee fund (TGF) lying with the exchange as TGF acts as a safeguard for investors from any counter-party default risks.

Investors who would be primarily acting as money lenders should inquire as to who is going to use the funds invested by them, what is their background, credentials, networth and so on. There should be clarity on end use of funds and how the borrower would be able to complete the pay-in obligation in case the contract had to be closed.

What is the mood among the foreign institutional investors in the market?

Large FII inflows have been the bulwark holding up the markets and keeping them buoyant despite the economic sluggishness and political logjam. They have pumped in record funds in the last two years. As we saw recently, small sell-off from them caused a disproportionate upheaval in the Indian stock markets. I think they are always looking for an opportunity to buy further, despite the steep rupee depreciation of over 20 per cent over the last one year pegging back their returns.

However, the current depreciated value of the rupee provides them an opportunity to acquire stocks cheap. Any FII putting fresh money is buying 20 per cent cheaper in dollar terms which means you are buying at Nifty levels of around 4,600!

Following the RBI’s move to tighten liquidity in the system, is there a liquidity crunch in equity markets as well?

Not necessarily linked to the RBI’s move, but most domestic funds have had redemptions and inflows with private insurance companies too. As a result when FIIs are absent or sellers stock markets tend to get rocked as no domestic funds can step in to buy anything significant (as they do not have inflows), the only saviour is always LIC.

Are investors more wary about commodity trading now following losses in NSEL?

I think so. The huge losses are fresh in their minds and in the absence of any clarity on NSEL the collateral damage to confidence on investments in the commodity market is to be expected.

Do you think the worst is over for stocks as far as decline in prices goes or is there more pain in the offing?

I think markets will continue to see huge volatility. I will not be surprised if once again in the near future we see the Nifty touching levels of both 5,000 and 6,000 and I am not talking about the range- bound markets. I feel the upheavals will be something to watch out for. But a sluggish GDP growth of around 5 per cent will cap any runaway rise in the markets and the markets will remain vulnerable if FIIs take the backseat.

COMMENT NOW