Govt needs to hike diesel price to avoid downgrade: UBS

In an interview to CNBC-TV18 Chhaochharia said, "Without hiking diesel prices it will seriously challenge the fiscal position of the government as well as the overhang of the credit downgrade from S&P."

Though diesel prices were last increased a year ago state-owned oil firms are currently selling it still at a loss of Rs. 10.33 a litre.  The government heavily subsidises diesel prices as the fuel powers much of the economy, especially in farming and transportation.

Shifting focus on the other main concerns, Chhaochharia warns that if monsoons ultimately turn out to be poor it will hit one of the parameters either growth or in terms of inflation and fiscal. 

As an investment strategy, he prefers BHELs as import duty is likely to be imposed on power equipment. Chhaochharia is also bullish on Exide due to its improvement in market share.

Below is an edited transcript of his interview.

Q: How do you think the market is placed right now given monsoons and earnings etc. Do you think the risks are higher or in the near term do you see the market climbing higher because of global risk on?

A: If you look at the local factors, clearly I think the market is being a little bit complacent. They are ignoring the risk of the monsoons. The positives expected out of post Presidential election government action like diesel price hike etc seem to be broadly factored in with the market moving up.

Having said that, global macro will play a big part in the Indian markets moves. India to that extent remains very exposed to risk-on and risk-off as we have seen over the last few quarters. That will remain the over riding driver for Indian markets, but local factors seem to be over priced right now into the current market levels.

Q: On your note about the monsoon and its likely impact, what makes you so worried about the lack of progress this time around? What do you think the damage could be for the market because of it?

A: Monsoons in itself in absolute terms is not really a big deal. As we have seen agri’s contribution to GDP in India has gone down substantially, it’s less than 15% now. In a direct sense it doesn’t impact the economy or the market in a significant way, but unlike the last three times when we had poor monsoons which is in 2002, 2004 and 2009, this time the economic cycle and trajectory is very different.

We are still on the downward trajectory in terms of economic growth and have still not bottomed out. Fiscally we are in a very tight situation. Inflation and the current account deficit are running very high and in that context it is very different from those periods. Again the severe monsoon that we faced in 2009, the impact was alleviated because of the huge rural support program which just started off before that, National Rural Employment Guarantee Act (NREGA), farm loan wavier etc.

For the government to do that this time, the flexibility is very limited. What makes me worry is that you can’t have the best of both worlds where you see fiscal consolidation, you see growth gradually coming back and inflation remaining under control in the case of poor monsoons. There is still hope for course correction in our view, it is still a bit early to say but if the monsoons remain poor it will hit in one of the parameters either growth or in terms of inflation and fiscal.

Q: Which are the clusters where you would start turning cautious now? If you had to tell your clients to start taking profits because of the risks that you have highlighted which are the clusters or stocks where you would be very cautious now?

A: Top down would be staples. Consumer staples will be the clear area and other areas would be more directly linked to agri exposure which would be something like tractors Mahindra and Mahindra and possibly even government banks.