S Naren, Senior VP and Head Equities, ICICI Prudential, said crude will cast a big shadow on market rallies from hereon. "It is tough to take a fundamental view on oil stocks due to high prices."

He said a strengthening dollar benefits companies with lower hedged positions. "We have a bigger exposure to the sector now than six months ago."

According to Naren, we may see some fall in agri prices after the monsoon sets in.

Sudarshan Sukhani, Technical Trends said that the Nifty has this narrow tight range between 5,000 and 5150 and this 150-point range is not likely to sustain. He said there is no say as to whether the Nifty will touch 5300 or 4950 but 5300 will surely be the first target.

Excerpts from CNBC-TV18’s exclusive interview with S Naren and Sudarshan Sukhani: 

Q: What is your sense on the markets after the recovery in March and April?

Naren: The real problem is crude at USD 128 per barrel. Four key products in India are based on crude. This kind of situation leads to a big hole in the oil subsidy and along with it fertilizer subsidy is also likely to get affected. We have a scenario where a bulk of the problem arises out of the oil and fertilizer bill which is located in the central government budget at this point in time for the next year. This economic problem is likely to cast a shadow on any big rallies from here. On the positive side, we were worried about food prices, particularly wheat, and the government seems to have done a very good job of procuring a good amount of wheat this year in the north.

International prices of wheat and rice are higher than what it is in India, although there has been correction recently,so there’s nothing to worry about. We hope the monsoon will put an end to our worries.

Crude will always create problems at this point in time because of the way crude is moving day on day and we are not having a pass through in India.

Q: What is the resolution to this problem because it has been persistent, sticky and stubborn and is not just going away as a lot of people wished it would? How do you think this whole crude situation would finally end?

Naren: Unfortunately, there are no easy answers. In the western countries, oil consumption goes down due to the passing out of costs to the end user. In the case of many emerging markets which include India, China and Indonesia, we have no pass through of all the price increases except a small pass through. This results in a situation where the demand continues to go up.So, the only solution is for oil prices to come down, which is certainly not in our control or for demand to go down globally.

For that, it is necessary for all countries to reduce the subsidy that they give which unfortunately will affect the poorer class of people. So, there has to be a solution where the prices of petroleum products are increased and a subsidy given in some other form to the poorer class. Therefore, there should be moderation in the petroleum consumption, while the poorer classes are not affected. This may be done through some direct payments of money or something like that, which will force them to reduce the problem on account of higher kerosene or LPG prices. There is no possible resolution for the problem till the elections and we have to live with this situation capping upsides to the market.

Q: How are you playing oil as a sector from a fund manager’s perspective? Do you find attractive opportunities in upstream exploration? Which one can be played as a theme because some stocks like Cairn have done very well?

Naren: We don’t have any long position in Cairn. We used to have it but we also believed that oil would not cross USD 120 and we did sell-off some of our Cairn stocks expecting an oil price drop.

But we were obviously wrong. In India, one cannot play the bull case in oil very easily because of all these subsides and the continuous confusion on what will happen to each individual company.

We do have an exposure to other companies in the petrochem space particularly companies, which have potentially a lot of gas fields. We do have exposures to such stocks. But playing crude directly in India is not so easy because there is a subsidy that has to be borne by the government. The government has a tough job apportioning this subsidy between the differing parties. This causes a derating of their entire sector. This has happened through this entire boom.

Frankly, in India, we cannot play the high crude price scenario so easily in a fund. 

Q: What about IT? That has been the most important sector leading to the upmove over the last couple of months? Do you think there is still valuation upside left in IT or would you start getting cautious now?

Naren: IT is basically a play because of the way the currency moved. One has got a 6% upside on the dollar which certainly benefits some of the companies, which are not fully hedged on their software exports.

IT becomes a very defensive play on the Indian economy given the way crude is going up. Trade deficit is going up and with the way the dollar has been moving up against the rupee. IT is a sector where we have a bigger position than we had six-months back when we were more worried about US economy and not very worried about oil to the same extent as we are today.