State-owned banks | Private banks: The transition from state-owned companies to private banks has begun and should continue over the next few months: Rakesh Arora

I know you are a long-term investor, but do you think all this crackdown on speculative trading will hurt the market sentiment or momentum or will it return to fundamentals next week?
Rakesh Arora: I don’t think it will have a big impact. Many retail investors are getting into the options market. It’s a quick way to make or lose money, but it doesn’t affect the investment that is currently being made. The shift to equities seems to be a permanent thing. I wouldn’t worry too much from a medium-term perspective. There could be a small bump, but it wouldn’t change the direction.

Would you attribute the rally we have seen in the market over the last few months to capital flows or do you think that strong fundamentals are supporting us? I asked that question because the first quarter earnings were not very good to begin with. It seems that SIP flow and mutual fund money are driving the market.
Rakesh Arora: Flows are driving the market, but this time, the market is supported by an improvement in many fundamentals. On the macroeconomic front, the fiscal deficit and the current account deficit seem to be largely under control. Inflation is moderating. We are expecting some interest rate cuts, not a deep cycle, but a small cycle of interest rate cuts, and the results are coming in as well, which means the first quarter was a bit of a grind because of the elections and all, but this time, the earnings downgrades are not happening.

This time, Wall Street is not leading the way, and this is due to the support of earnings, formalisation of the economy and strong macroeconomics. Globally, things are also turning favourable for India as among emerging markets, we are overtaking China in terms of weighting in the MSCI index. All these factors point to strong support for this rally. I don’t think it will slow down anytime soon.

The state-owned bank is an index that has been in decline and has experienced some pressure over the past few days. Why does Wall Street prefer private banks over state-owned banks?
Rakesh Arora: Public sector banks had a dream run because the banking cycle was very favourable and during favourable cycles, normally weaker companies do better because they are coming from a much lower base. But now the cycle is maturing and things are getting back to basics. Hence, credit costs are rising. We expect NIMs to come under pressure due to interest rate cuts and deposit growth is sluggish compared to credit growth. Better managed banks will start doing better and that is why the shift from public sector companies to private sector is starting to happen and this trend should continue over the next few months.

What else is looking increasingly positive? Where are you investing new money in the work? What segments, sectors and stocks are you betting on?
Rakesh Arora: We are focusing primarily on domestically-focused sectors and industries, and in this respect, it is also becoming more of a bottom-up market. The overall rally has developed and now individual stock stories are important. So companies that are growing quickly have some moat or competitive advantage. Those are the things we are looking at. It has become a bit more sector-agnostic and much more bottom-up.What is the vision on IT and the pharmaceutical industry?
Rakesh Arora: He pharmaceutical sector After five or seven years, it has started to pick up and in the last few years, they have gone through huge issues with the US FDA and all that seems to be behind them. There is a turnaround happening due to the merger with China and one with Indian pharma companies. Even CDMO is one of the spaces where things are looking very good and in the pharma sector, the turnaround has just started and there is a long way to go because there are years of underperformance that need to be addressed.