Sep 20, 2013, 10.29 AM | Source: CNBC-TV18
RBI should ensure that there is some liquidity in the system when the Fed taper actually happens, says UR Bhat, managing director, Dalton Cap.
UR Bhat (more)
MD, Dalton Capital Advisors | Capital Expertise: Equity - Fundamental
"I think there is a possibility that the RBI might reverse some of the draconian measures like the 300 points increase they did on the micro, small and medium enterprises (MSME) and also on the method of competition of cash reserve ratio (CRR) that effectively increases CRR by almost 1 percent," he told CNBC-TV18 in an interview. He expects the Indian rupee to see some pressure in the near-term.
Meanwhile, Bhat is not impressed by the massive rally seen in most financials yesterday. He says that the rally was only a one-day move and the fundamentals of the sector have not improved.
Also read: RBI may roll back rupee volatility curbing measures: CNBC-TV18 Poll
Below is the edited transcript of Bhat's interview to CNBC-TV18.
Q: We are getting to this policy extremely confident and on the back of huge rally. What is your expectation from the policy today?
A: The Fed has given some space for Reserve Bank of India (RBI) to act because what the Fed has said is that taper will come but probably with some delays. Therefore, the RBI also has to ensure that they have some fire power left when the taper happens. Hence, I think there is a possibility that they might reverse some of the draconian measures like the 300 points increase they did on the micro, small and medium enterprises (MSME) and also on the method of competition of cash reserve ratio (CRR) that effectively increases CRR by almost 1 percent. That is something that they might reconsider.
Q: What is the immediate trade? We saw the financials run-up so much but ultimately it is going to be a bad earnings season for most industrials and may be a good one for exporters, they may up their guidance. So do you think the next trade will be a churn, away from financials and towards exporters, IT?
A: Absolutely. Yesterday, financials surprised everybody with the strong move which was largely unwarranted because if one really sees the fundamentals, they have really not changed, it is just the sentiment change for probably a day.
Q: There is a marginal improvement in margins I would assume if the cost of money falls if as you say the marginal standing facility (MSF) rates come down?
A: However, it is all very temporary and the larger question is the accretion of non-performing assets (NPAs). It is not going to have any impact on that. So, when the results come, there would probably be some disappointment vis-à-vis yesterday’s upward movement. So, I think that shift, that churn would certainly happen.
Q: Two part question, what would you do if you were managing a large fund now in India, would you sell into this rally? And two what would you do depending on what the Reserve Bank of India said? If it reduce the MSF rate what would you do, if the outside chance indicated a higher repo because he is worried about consumer price index (CPI) what would you do?
A: As of today, based on yesterday’s rally there might be case for some profit booking. I am keeping the powder dry for fighting another day as it were. But at the same time, I think one should be buying for the fact that things have really not changed and that is why there is a very strong case for booking profits now. I am keeping the powder dry as it were to buy more when there is an eventual correction probably few days from now.
Q: What about IT names? That is one sector which has been debated because of currency stabilising.
A: I don't think the currency has irretrievably appreciated to whatever level it was yesterday. I think currency pressures would come back because inflation is near double digit as far as CPI is concerned.
There is nothing to suggest that the current account deficit (CAD) might contract dramatically and the pass-through effects of higher oil prices, depreciation of the rupee, will certainly be felt on inflation. So, there is nothing to suggest that things have dramatically changed. So the rupee is likely to depreciate after sometime, hence, I think it is worthwhile being invested in IT because there would be further gains there. I think it is time to top up after yesterdays move.