S Balakrishnan, ED, Centrum Capital, said he would stay away from the markets if oil continues to buy and inflation is going to spook. "I would reduce my positions maybe by at least 50%, stay in cash, and see what happens in the next quarter to the oil prices.  I would not sell everything. I would definitely stay light on equities, would wait for some more time, and see if there is a cooling off, because in terms of valuation we are more or less fairly valued and the growth numbers for next year are still not been downgraded enough. The upside is virtually capped."

Excerpts from CNBC-TV18’s exclusive interview with S Balakrishnan:

Q: Are we going to get very nasty surprise coming to terms with inflation and crude not receding from its highs at all?

A: It is a huge worry for us if one read today’s report which quoted crude trying to touch USD 150-200 per barrel. That will put a spanner in the works as far as our markets and economy is concerned. That to me is the single biggest worry which brings back the focus to inflation. Going forward, there is going to be pressure on earnings across the board as well as on demand.

If the Indian government keeps retail prices stable, it is not a healthy sign because when countries’ balance sheet take a hit, either way it is a whammy. There is no escaping that reality.

Q: We have seen a different impact on Indian stocks. Cairn India is up 4-5% while at the same time oil companies are down between 3-4%. How would you place yourself among the different streams of the oil sector?

A: The bet is that if oil prices keep at this level and inch higher, then my bets would be on oil producers and not just oil marketing companies. The way oil marketing companies are structured in India, they keep taking bigger and bigger hits. With political interference, its best to stay away from those companies till the structure changes. This cannot happen till we have a government without the Left in place.

Q: You outlined the impact of crude at USD 150 per barrel on various aspects of the Indian balance sheet and the macro economy. With higher interest rates, higher inflation, and impact on earnings, how would you play stocks in general? Are these levels to buy at all or are these levels to actually sell because you are going to see some kind of drastic impact later on in the year?

A: If this oil trend is going to continue and inflation is going to spook, I would stay away from the markets. I would reduce my positions maybe by at least 50%, stay in cash, and see what happens in the next quarter to the oil prices.  A lot of it maybe a little bit of an over reaction also because we tend to over react to all news now, whether it is good or bad. The US markets rallied including the dollar on a small positive surprise and I don’t know if the amount of rally was justified.

So, I would not sell everything. I would definitely stay light on equities, would wait for some more time, and see if there is a cooling off, because in terms of valuation we are more or less fairly valued and the growth numbers for next year are still not been downgraded enough. As far as I am concerned, the upside is virtually capped.

Q: Any place to hide like IT for instance?

A: IT is a defensive bet like FMCG. Valuations are not looking good because the rupee has weakened but every large company would have hedged its foreign exchange earnings which actually may not give them enough of upside should the rupee weaken. In IT, the downside is limited if you are compelled to invest in that.

Maybe some private banks could be a hiding place because the worst of the derivative hits are more or less out into the open and the valuations have come off steeply. There is supply shortage of commodities, so metals could be a hiding place.