Investors Need To Watch India's Ability To Absorb Shock, Says Spark Capital's Jayaraman

India's 'margin of safety on the macro' is wearing off, which can lead to nervousness, says Jayaraman.

Shock absorbers manufactured by Gabriel India Ltd. (Source: Company website)
Shock absorbers manufactured by Gabriel India Ltd. (Source: Company website)

Investors need to watch India's falling liquidity and forex reserves as these can can lead to nervousness in the market, according Ganeshram Jayaraman of Spark Capital.

Over the last two and a half years, India has dealt with several macroeconomic issues and fared well, Jayaraman, head of institutional equities at Spark Capital, said in an interview with BQ Prime's Niraj Shah.

He attributed it to increase in foreign exchange reserves by $200 billion, which led to Rs 15 lakh crore of surplus liquidity in the banking system. Software services sector exports, commodity prices, remittances from non-resident Indians, and foreign direct investment contributed. And surplus liquidity helped the RBI defend the rupee amid excessive selling by foreign investors and oil price inflation in the last six months, he said.

But this ability to "absorb the shock" is at risk because of three factors: rupee liquidity is at a marginal surplus level, forex reserves have fallen by $130 billion, and import cover has fallen below eight-and-a half months or so, he said.

This means the "margin of safety on the macro" is wearing off, which can lead to nervousness in the context of market valuations and earnings expectations, he said.

Jayaraman suggests being patient and watch if the imminent policy changes can withhold forex reserves, rather than taking any immediate steps in defence.

The forex reserves have a direct effect on equity prices, said Jayaraman. A $25-billion fall in the kitty means that the rupee's liquidity will turn negative, prompting higher rates.

Key Themes

Jayaraman is betting on the property market. "The real estate cycle lasts for five to seven years, and we would like to believe that we are two years into recovery as the construction cycle itself lasts three years."

The last two years have seen more unsold inventory being cleared than fresh addition, he said. "We are yet to see momentum pick up on new launches, and if interest rates don’t increase by another 100 basis points, real estate stocks and property rates can be considered a safe zone."

Steel, metals, cement, refineries, oil, and textiles are some sectors where capex can be anticipated, according to Jayaraman said, "Earnings drivers of capex are changing to become a lot faster."

"We need to prepare for both beneficiaries and financiers of capex."

SME capex can pick up as they are seeing a revival of demand with a decrease in imports, he said.

Watch the full interview here: