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'IT sector provides a defensive bet'

June 07, 2011 14:15 IST

PCGiven the recent weakness in the rupee and the high forward premium, information technology companies can prove to be good defensive stocks with low downside risks in the prevailing market conditions, Moses Harding, head (global markets group), IndusInd Bank, tells Puneet Wadhwa.

Edited excerpts:

Which sectors are you bullish on in the current market scenario?

Given the prevailing scenario, I would prefer to stay away from the equity market.

The sentiment is weak; there is no clarity on inflation and growth; external sector is uncertain and, above all, the operating results of the next couple of quarters will be under severe pressure.

There is the combined impact of lower capacity and margin compression; hence, it would be prudent to let go of the current quarter and await turnaround signals for the selection of sector/stocks.

Do you feel the information technology sector provides a defensive bet?

Yes, the recent weakness in rupee and the high forward premium has improved the bottom line. IT companies are generally cash rich and higher interest rates would also add to bottom line.

The domestic demand for IT products/services is generally good and an early turnaround in western economies will help. Given these factors, IT sector is a good defensive stock, with relatively low downside risks.

What is your outlook on the banking space?

The next couple of quarters will be a challenge for banks.

There will be pressure on net interest margins (NIM), but the differentiator will be the ability to maintain growth in the net interest income and other income.

Banks funding longer tenor fixed rate assets through short-term floating rate liabilities will have a negative impact on NII, as the incoming cost of funds will be significantly higher than the cost of outgoing deposits.

However, I do not see any major impact on the profitability of banks and the challenge will be to retain productivity, with a mild hit on hygiene efficiency.

Are there concerns over the rise in cost of funds, given the recent rate hike by the Reserve Bank of India?

Borrowers are now tuned to higher borrowing cost while depositors are happy getting higher returns on their funds.

The concern is only for borrowers, who will face margin squeeze in their business due to the steep rise in interest cost.

This would lead to a cut in the economic capacity and reduce demand push; considered good to release pressure on inflation.

How do you expect the bond yields to pan out in the near-to-medium term?

Bond yields will stay under pressure till the July monetary policy.

There will be inversion in the yield curve; shifting the investor appetite towards the shorter end to avoid negative time value.

Given the expectations regarding the next round of rate rise, the immediate target for 364 T-bill yield is 8.5 per cent and that for the 10-year benchmark bond yield is 8.5 per cent.

RBI's stance in the July policy will be critical to set the next direction.

I expect the apex bank  to give a signal for an end to the rate rises, as 10-year bond yield above 8.5 per cent may not be good for the economy and its stakeholders.

Puneet Wadhwa in New Delhi
Source: