Home » Articles » Continue To Be A Long Term Optimist Uday Kotak On Markets Economy and Ilfs Muddle
How it helps?
  • Zero maintenance charges
  • Zero fees for demat account opening
  • Volume based brokerage
Reach Us
Learn the art of Investing

Read More >


    Continue to be a long-term optimist: Uday Kotak on markets, economy, and IL&FS muddle

    Publish Date: November 6, 2018

    ‘Picture abhi baki hai.’ Mr Uday Kotak, vice chairman and managing director of Kotak Mahindra Bank, drew parallels between the current tumult in the stock markets with the dramatic contours of a Hindi film.

    Mr Kotak assured that despite the markets hitting a low point in the last few weeks, he expected normalcy to return. He believes that ‘the movie called India is a sound movie’ in the long run. He also touched upon the country’s economy, the IL&FS fiasco, and the uncertainties that come with state and general elections.


    The following is a quick lowdown on what Mr Kotak had to say on the eve of Diwali.

    1. ‘Make in India electronics has to be the mantra for India’s future.’

    Mr Kotak noted that India imports roughly USD 50 billion worth of electronic items. ‘India’s electronic imports have doubled in the last five years,’ he said while speaking about growing stress on the country’s current account deficit. ‘We are importing everything—from computers to iPhones to every single electronic gadget.’

    This is where the Indian government needs to step in, he said. ‘We must revitalise ourselves and increase focus on Make in India.’

    The Make in India initiative was launched by the current Indian government to encourage companies to manufacture goods in India. While the project’s success has been tepid so far, increased manufacturing can go a long way in solving India’s skewed balance of payments.

    Mr Kotak was especially concerned about India’s growing current account deficit (CAD). He said it was important for India to not let it cross beyond 3% of GDP. He added, ‘The true test of a country’s long-term sustainability is to have a narrow trade and current account deficit. Therefore, this should be India’s number one priority.’

    Rising global crude oil prices, a depreciating rupee, and outflow of foreign investments are but a few reasons for the increased pressure on the country’s CAD. Analysts reckon that the CAD can expand to as high as 2.8% in 2018-19 as against 1.9% in the previous fiscal.

    Related read: What does a high current account deficit mean to investors?

    The combination of soaring oil prices and a falling rupee has been a sore point for the Indian economy. However, the good news is that oil prices have climbed down from their multi-year peaks. Mr Kotak feels that the country will be able to soak up the pressure provided oil prices remain between USD 70–80 per barrel.

    2. ‘We must be vigilant and alert to ensure that there is no contagion effect in the financial sector.’

    Mr Kotak was ‘humbled’ that the government gave him the responsibility to solve the debt market crisis. The crisis was set off after Infrastructure Leasing & Financial Services Ltd (IL&FS) was found to have a total debt obligation of Rs 91,000 crore, much higher than it could repay.

    Since several banks and mutual fund houses had investments or exposure to the infrastructure group, there were contagion fears. This resulted in a liquidity crunch in the bond markets, thereby throwing the debt market into a tailspin.

    Related read: IL&FS impact on banks and mutual funds

    In order to address the situation, Mr Kotak was recently appointed as the chairman of the newly-instated IL&FS board. ‘This is a national responsibility and we will do our best to find an appropriate resolution,’ he said, addressing all stakeholders.

    So far, the new board helmed by Mr Kotak has looked at a plethora of options in order to solve the problem, with capital infusion, asset monetisation, and selling off assets being three of them. However, he has warned that stakeholders may have to endure ‘significant levels of pain’.

    The IL&FS crisis led to a panic sell-off in the markets. A string of recent defaults at the company haven’t helped matters either.

    The non-banking financial institutions (NBFCs) and housing finance companies (HFCs) have been particularly stricken. That’s because mutual fund houses soon started selling commercial papers—they are sold by companies to meet their short-term financial needs—at a steep discount by mid-October.

    As a result, there was a liquidity crisis among NBFCs and HFCs, also known as shadow banks.

    Related read: IL&FS crisis looms large over IndusInd Bank

    Mr Kotak said they were working to improve liquidity in this sector and ensure we have a ‘soft landing’. He also wanted policymakers to come together and find ‘appropriate refinancing’ solutions to solve the crisis.

    Briefly addressing the banking sector, Mr Kotak believes ‘the fundamental bedrock of Indian banking is strong enough to withstand current pain and move forward’.

    3. ‘My advice is to focus on high-quality, sustainable companies. Don’t be carried away by tips and rumours.’

    Mr Kotak also spoke about the markets, which have got quite a pounding in recent weeks. But he downplayed the radioactive nature of the markets at the moment. Instead, he insisted that traders should focus on the fundamentals of the company.

    He added, ‘For long-term investors, should the markets correct from here, there would be an opportunity (to enter the market).’

    Related read: Your survival guide in choppy waters

    Mr Kotak also expects the markets to be in a reasonable range: ‘give or take plus-minus five or 10%’.

    Within that range, he said there would be trading opportunities for individual investors. But for the medium term he suggested keeping a lookout for three things: the macroeconomy, the Indian economy, and specific sectoral challenges and issues in India. Keeping these factors in mind, he advised that one should ‘continue to be a long-term optimist’.

    4. ‘A fundamental shift in US trade policy is changing global trade and dynamics.’

    Mr Kotak pointed out that the Donald Trump administration has ushered in a new wave of protectionist policies. These have rattled the foundations of global trade. For instance, by imposing steep tariffs on goods from the European Union, China, and Mexico, Trump has sparked off a global trade war. This has led to retaliation from the affected countries.

    ‘Buy American, Hire American’ was the centrepiece of Trump’s election campaign. The US President also vowed to re-negotiate trade deals, scale back outsourcing of US jobs, and shield US companies from foreign peers.

    Related read: Further tweaks in H1-B process can hurt Indian IT companies

    Against this background, Mr Kotak feels that the growing protectionism will compel ‘every country to fend for itself and manage its current account in a much better manner’.

    He also opined that India must not expect the US and other countries to ‘keep their markets open’. That’s because the trade slugfest may intensify in the coming months. Trump has been emboldened to sharpen his anti-free trade rhetoric as the US economy has enjoyed low unemployment levels and rising wages in the last few months. China, on the other hand, faces the possibility of its debt-plagued firms defaulting on loans.

    All these factors may lead to falling demand for exports—a situation which could hurt India’s CAD.

    5. ‘I do hope we get a stable government which can sustain the growth momentum.’

    The 59-year-old felt that the impending state elections in Madhya Pradesh, Rajasthan, Telangana, Chhattisgarh, and Mizoram will have ‘bearings on how the markets respond’. The election results in these states are crucial because they are a precursor for next year’s general elections.

    A BJP reversal in Rajasthan and Madhya Pradesh is expected to make the market jittery. That’s because traders want to see a strong government capable of making swift and tough decisions, instead of a coalition that may dither in policymaking. Nevertheless, Mr Kotak believes that India can ‘weather any political challenge’.

    The ongoing mid-term elections in the US has also added to the uncertainties, prompting market-watchers to be in standby mode.

    Also read:  

    Click here to go back