CLSA’s Christopher Wood poses for a photograph after a Bloomberg Television interview in Tokyo, Japan. (Photographer: Kiyoshi Ota/Bloomberg)

Legitimacy In Argument That RBI Is Overcapitalised, Says CLSA’s Chris Wood

Amid a standoff between the Reserve Bank of India and the government over surplus reserves, CLSA’s Christopher Wood said there was some legitimacy in the argument that the central bank is overcapitalised.

The differences between the Modi administration and the RBI became public after Deputy Governor Viral Acharya, in a speech, warned against eroding the independence of the central bank. That came after the government started talks with the RBI under a never-used rule that allows it to give directions in public interest. While it later denied seeking Rs 3.6 lakh crore from the RBI, that was after days of speculation in the media.

The Modi administration is looking for capital to boost lending and consumption in an election year. And Wood, speaking on the sidelines of the 21st Annual Investor Conference in India, said the monetary policy is running too tight in India, given that credit growth is weak and there is a legacy problem of bad loans in the banking sector. And an argument can be made about why the rates should be lower.

Risks To Indian Equities

Wood said there was a need to factor in a potential slowdown because of the credit crunch non-bank lenders were facing after defaults by the Infrastructure Leasing & Financial Services Ltd. and its subsidiaries roiled credit markets. The IL&FS downgrade caused considerable concern in the global investor community and it might take some time for that sentiment to stabilise, he said. Investors, he said, hope that the worst is behind them.

He sees commercial paper rollovers amid the liquidity crunch and election as key risks when investing in Indian equities. In fact, Wood is not an emphatic buyer of Indian stocks and instead finds bonds lucrative with the benchmark yield at 8 percent.

He is avoiding India as at the current valuations India is not cheap and there could be corrections if the BJP were to perform poorly in state elections, Wood said. Instead, he prefers buying cheaper Chinese equities.

The Next Big Bet

Still, Wood considers real estate an opportunity. “One investment for the next five years would be to identify which companies are going to be the beneficiaries of what’s going to be a dramatic consolidation in the property market.”

The triple whammy of demonetisation, a new housing law and liquidity now presents a very attractive opportunity in quality Indian real estate companies, he said.

Watch the full interaction here: