Jun 14, 2012, 01.22 PM IST | Source: CNBC-TV18

Global events important than 25 bps repo cut: UBS India

Investors are betting that the Reserve of India will pump in liquidity to fix the tight liquidity situation to some extent. Indian market, too, is holding firm as hopes are building for a rate cut in the monetary policy review on June 18.

Investors are betting that the Reserve of India will pump in liquidity to fix the tight liquidity situation to some extent. Indian market, too, is holding firm as hopes are building for a rate cut in the monetary policy review on June 18.

However, Gautam Chhaochharia, head of mid-cap research UBS India does not think RBI's monetary easing alone can change economic situation. He believes that more than a rate cute the key is whether the RBI is in a position or looking at cutting rates through the year to a lower interest rate structure.

"So it’s still at best a signaling tool that RBI is supportive of growth rather than anything more than that,” he said in an interview to CNBC-TV18.

Chhaochharia is expecting a 50 bps CRR cut and no repo rate cut.

As an investment strategy, he advises clients to be defensive for couple of quarters. Chhaochharia is positive that the market is attractive for investors with a two-year perspective.

Also read: Premature easing by RBI may aggravate problems, says Chetan Ahya

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: What are your expectations from the RBI?

A: Our official stance is still a 50 bps CRR cut and no repo rate cut.  But there are some enablers in play for the RBI to be more proactive in terms of crude, inflation, and IIP. So, RBI could surprise, but our official expectation is still a 50 bps CRR cut.

Q: If it plays out that way i.e. there is no direct rate action from the Reserve Bank, do you expect to see a big turnaround in the market because that’s what the market seems primed for some kind of rate action?

A: Yes, it could be a bit of a disappointment for the market in the short-term because there is a broad based expectation of a 25 bps cut in repo rate. So, if there is no repo rate cut then there definitely could be a marginal short-term disappointment.

Q: How important do you think the global events spitted around that policy meet will be, both what the Fed has to say, what happens in Greece? Is it going to be a make or break for Indian markets as well?

A: Yes, they will be much more relevant in our view because the risk appetite globally will drive the capital flows. Both markets and economy right now are heavily dependent on capital inflows. So, they are much more relevant right now.

Twenty five bps rate cut here and there really doesn’t change the needle in terms of fundamentals for the economy in the near-term. What is the key from a monetary policy point of view is whether the RBI is looking at cutting rates through the year to a more lower interest rate structure in generally. That doesn’t look like the case right now. So, it’s still at best a signalling tool that RBI is supportive of growth rather than anything more than that. So, global macro events will be the bigger driver for markets.

Q: You recently had a midcap conference in which you showcased some fertiliser companies as well. Would you back them because there has not been too much action from the government on that front for the last many months?

A: Yes, we will back them. Coromandel has been impacted over last couple of quarters because of the weak monsoons in South India impacting volumes in the December and March quarter. There are some concerns about inventory in the system, but even that should be handled in the June quarter.

Going forward, these companies look very well placed in terms of growth coming back because of expected normal monsoons. Margins, anyway, have been quite stable for these companies. That has been missed by the markets. The stocks are quite attractively valued. So, definitely we are positive in backing these guys.

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