Nilesh Shah, Deputy MD, ICICI Prudential AMC, said the market is consolidating after the recent rise. "The market is looking at cues from the results season, and is waiting for the outlook on monsoon."

High domestic inflation and rising crude prices remain a concern, he said. "Global concerns are receding and will only have a short-term impact. We are seeing uncertainty, and not seeing a clear direction for the market in near-term."

Shah said he is surprised by weakness in the rupee. "We were expecting it to firm up on account on inflation control measures. However, money market flows, and payments for oil allowed RBI to weaken the rupee, which is likely to appreciate after seeing some more weakness."

He advises investors to stay away from textile companies. "Threre is not much business potential in textiles, as companies are suffering from cost pressures."

Tarini Vaidya, Country Treasurer, Centurion Bank, said weakness in the rupee was started off with oil buying and kept depreciating further on momentum.

She sees more declines in the Indian unit. "It can go down to Rs 42 per dollar on Friday or early next week and can depreciate up to Rs 42.50 per dollar, if it slips below Rs 42.2 per dollar in the near-term."

Excerpts from CNBC-TV18’s exclusive interview with Nilesh Shah and Tarini Vaidya:

Q: How have you read this week’s trade?

Shah: There was not much action this week. After running up from the lows, the markets are now trying to consolidate itself. One will have to see whether this will be a time correction or a price correction.

Q: How are you reading the overall environment right now: the rupee, inflation, crude and global cues put together? Is it easier to argue for upside in the near-term or a little bit of a retracement?

Shah: It is very easy to argue for an upside of 15,000 levels when everyone was talking about 12,000. Unfortunately, neither is anyone is talking about 21,000 levels of index so that you can categorically say that is not going to happen and nor are people talking about 10,000 or 12,000 levels of index, so that you can say that is also not going to happen.

Somewhere the opinion is divided. The numbers are rising but that is more because we are accounting inflation in the price rise right now. The price is going up in this period only. So, the market will take into account the inflation numbers and that will not be that big a cause of concern going forward.

Oil prices at USD 122 per barrel are certainly a cause for concern. But to some extent, we are immune from that because the PSU oil companies and the government’s Budget rather than consumers absorbs the losses or the risk. So as long as the oil price hike is not passed on to the consumers, the economy will probably will remain immune in the short-term. Eventually, we will pay the price by higher fiscal deficit and its consequent impact of the same.

Global cues now seem to be settling down. We had some of the global dignitaries visiting us and their message or feeling is also giving some comfort that we have now seen 70% of the horror movie and 30% is pending.

So, if you put all these things together alongwith the favourable monsoon forecast, there is no rate hike by the RBI in credit policy against almost everyone’s expectation and quarterly results that are coming in are more or less in line with expectations and are going above expectations.

The market is in a half line zone or in a no man’s land; neither is it going to go up conclusively nor is it going to go down conclusively. We have a market which is a little bit illiquid because of the absence of huge retail participation which is being seen in lower OI position.

We also have some amount of limited arbitrage participation because of the increase in the STT and change in the short-term,. So, without the buffer of the retail and arbitrage who are able to absorb institutional flows, if its slightly an illiquid market and some buying will pull the market up and some selling will pull the market down. But there is no net-net conclusive direction. 

Q: How are you reading the rupee’s sharp depreciation? What impact could it have on the equity markets at large?

Shah: It has come as a big surprise. Everyone was expecting that the rupee would appreciate to control inflation and then all of a sudden the rupee has depreciated significantly and sharply.

One possible reason was that may be people were expecting the RBI to raise interest rates and as the interest rates have not been raised, they are taking the money out. Even though, there is a lot of restriction in terms of bringing debt money into the country, people have found a way. Those things have combined and helped the RBI to inch in the depreciation of the rupee.

It is difficult to say how long the rupee depreciation will last. The rupee should appreciate from current levels after a little bit more of depreciation.

Q: We have all been scratching our heads and trying to figure out why this suddenness and the sharpness of this depreciation? Anything that is doing the rounds in the grapevine of any particular corporate or any particular body who might have triggered this off?

Vaidya: It started out with oil buying, but really just develops momentum and you don’t see any inflows coming in. Exporters begin to get a little concerned and it builds on itself. So, what we have now seen over the past couple of days is exporters canceling some of their contracts that they had booked earlier. So, it really gets the momentum from the fact that you have had two straight days of the rupee falling and no inflows coming in.

Q: Do you extrapolate this trend now to say 42 is just a matter of time and maybe eventually 43 or do you think there will be a stop here because it has been too sharp and too quickly?

Vaidya: No, there will still be some more declines in the rupee. I think 42 is pretty much a given in the very short-term; perhaps as early as tomorrow or even early next week. The next important point to watch out for is just a little above 42, 42.17 or 42.20 or thereabouts.

If that breaks, then the momentum carries it on to 42.50. All eyes are on the regulator as well because a stronger dollar results in importing more inflation.

So, there will be some modicum of restraint with some portion and just watching what the regulator might do.

Q: What have importers been doing out here in the last couple of days?

Vaidya: Nobody has really booked forward as such. The large importers haven’t really come in. So, it has essentially been oil buying to a very large extent. That really is a spot in the very near-term. The larger importers are still waiting and watching. I haven’t seen those guys coming in.

Q: What would it do to the global investor sentiment? Do you think FIIs worry about these things because it goes against them? Would it lead to some amount of jitters or would they take it in their stride?

Shah: They will take these jitters into stride. No one is talking about the rupee’s long-term depreciation. It provides them a greater opportunity to bring money at this level and not only benefit from the equity upside but also from the currency upside at this level. So, the rupee depreciation in the current environment is taken as a short-term rather than a permanent long-term feature.

Q: How do you position yourself in sectors like IT and textiles given what’s going on with the current scenario?

Shah: Textile is easier to take a call. Stay away from that. The rupee depreciation, on a temporary basis, is not going to materially impact the profitability of this company.

The kind of margins, which they are operating upon and slight movement in currency, takes away a lot of their margins. As of today, we really don’t see too much of business potential in the textile sector which is reeling under the onslaught of currencies. The other cost pressures are notably power, wage and salaries.

IT is a bit of a difficult thing because it has run up substantially except for today’s correction. Secondly, valuations which are at a discount-to-market were inline with the market. The banking and financial service sector in the US is still not out of the woods. They probably have a lot of things to do before they can spend time and money on IT budgets. So, still it’s a slightly tricky kind of a situation. As a fund manager, I would rather be underweight on the textile sector and neutral on the IT sector in this kind of an environment. 

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