‘Think of special agricultural zones, not SEZs’

It is natural for commodity prices to rise at a time when stock prices are appreciating, feels Mukul Pal, CEO of Orpheus Capitals. A global alternative research firm based in Romania, Orpheus Capitals covers emerging markets in Eastern Europe and India, across a host of global asset classes including metals, energy, alternative energy, agro commodities, bonds, interest rates and ETFs over multiple timeframes. The company plans to start operations in India soon, Pal told U B Prem in an interview. Excerpts:

What is your take on inflation? And have interest rates peaked?

Even if we assume interest rates have some potency to cool asset markets, it is too soon for us to anticipate softening of interest rates. And to expect the authorities to control food prices and prices of essential commodities, in more or less a globally determined price scale, is expecting too much. Agro commodity prices have been depressed for many years, which is changing. And weather vagaries, if any, should only complicate the current situation. You cannot expect a mild disinflation scenario to last for decades, where just stock prices increase while essential commodity prices remain depressed. The only way out seems to be a vibrant risk management in the form of commodity exchanges, which seems to be in place and is growing.

How best can India and China use their mounting forex reserves?

Chinese exchange rate policy is different from India, which is more flexible about market demand-supply forces. And to say Forex reserves are mounting is a matter of perspective. What looks large now might look meagre after four years. What seemed like a volatility containment exercise for RBI might just turn awry, as volatility increases for the rupee. And even if not in the short-term, oil at $100 is a multi-year reality and what looks huge now might be a saviour for India’s increasing oil bill. The other big thing could be to increase gold reserves, as a proportion of total reserves.

There are fears that monetary tools are becoming increasingly ineffective in keeping inflation under control…

Ineffectiveness of monetary tools is  did not work in Japan even on many historical occasions. Unfettered credit growth fuels financial profligacy, which causes asset bubbles. Undermining the credit growth undermines the whole banking business philosophy. So, modern economics has no way to undermine the capitalism it engenders. There is no soft landing and econo-history illustrates the cyclicality of harsh corrections.

Some say the gradual opening up of the economy has insulated a vast majority from financial upheavals, while another section advocates acceleration of reforms. What is your take?

India remains a top emerging market story. Despite any harsh correction that we may witness, the market will outperform relative to the other developed economies. If you are speaking about relative insulation, yes you are right. Acceleration of reforms on the currency risk management sides are steps in the right direction.

Is the time ripe for full convertibility of rupee?

With the current freedom of cross-border financial flows, full convertibility is just another milestone.

Which sectors could witness high growth rates in the immediate future?

Despite any short-term slowdown on oil prices, energy sector remains a long-term story with special emphasis on natural gas. Even the nascent alternate energy sector should offer attractive returns over the next few years. And alternate energy also relies on agro commodities. Even this should keep the commodities like soy and corn attractive. On the equity side, apart from energy, utility and staples sector should start emerging as the next outperformers.

Which sectors are likely to be drags and why?

We remain underweight on financials and technology from last year and continue to anticipate underperformance here. Both these sectors are early economic expansion sectors. And since we are in late economic expansion stage, the respective sectors should lag.

Will the SEZs usher in the growth story envisaged by planners?

It was in the 1990s that we could have pushed ahead with SEZs more effectively than now. Now, when we need more agro focus, we are still pushing ahead with services. India needs an agricultural reform and pushing people to manufacturing and non-agricultural pursuits comes later. I think more then SEZ, we should be working on SAZ’s (special agricultural zones).

Where do you see the Sensex ending this year?

We are already half way down in 2007. Our early January outlook talked about a negative first quarter, which happened. Above 14,700 we can go till 16,000. But at this stage, even a 14,700 breach looks doubtful to me.