RBI may raise reverse repo by 25 bps: Enam

Nandan Chakraborty, Head of Research, Enam Securities, said the Reserve Bank of India, or RBI, will continue to remain hawkish and may raise the reverse repo by 25 bps. "The central bank may also pare down GDP growth estimates. We also see some measures to ease liquidity flows."

He feels that most fears are factored in.

Excerpts from CNBC-TV18's exclusive with Nandan Chakraborty:

Q: What’s your expectation from Dr YV Reddy today and how are you approaching the rate sensitive sectors, banks particularly, in the light of inflation and the interest rate turf now?

A: With inflation having touched 7.33%, the RBI will continue to be hawkish because that’s their primary agenda. The secondary agenda is growth. There could be increase in the Reverse Repo, because if they hike Repo, there is too much lag for it to have effect. So, may be the Reverse Repo will be increase by 25 bps or so, there may be a little bit of moderation on the GDP growth rate for FY09, and a slew of administrative measures both good and controlled oriented. This is to do with easing export of capital from India for corporates, bond market development, may be in shrinkage in margins, and increase in risk weightages both to control liquidity as well as to avoid forex derivatives.

As far as interest rate sectors are concerned, there are basically two direct sectors one is auto and the other is banking and indirectly the infrastructure and capital goods sector. Banking is one of those sectors which on a long-term basis is still very undervalued, while this interest rate would effect public sector banks more than private sector banks in general. But both private as well as public sector banks are under valued, so a lot of the fear is already discounted in. The reason why they are undervalued is because in the short-term they are more vulnerable. If you can’t take short-term volatility, then don’t go into banks but for the long-term that’s good.

In auto, there are certain systemic things that are going to happen on which we can’t take a call like how the Nano or JLR will do and how Maruti will cope with competition and so on. So, these are the things, which are still to unfold. Till then, competition seems to be huge and raw material pressures are also there. There is salary pressure and stuff like that. So, auto is not to do with interest rate, it has problems of its own.

The third one is indirect which are engineering and infrastructure sectors. People who give orders to capital goods companies are moderating their own growth expectations, hence their order book have decelerated. The infrastructure sector is quite undervalued.

The telecom sector could see a lot of upward positive surprise.

Q: You have gone underweight on the capital goods sector, is it the sort of earnings disappointment you have seen this quarter that has caused that rating?

A: In terms of market capitalization, most of the capital goods sector is into power equipment where there is competition. The other part is the general capital goods sector, which is non-power related. Since all the results are not out, we can’t take a complete call but we have seen peaking of the order book.