Mkt forming base for durable long-term rally: Ridham Desai

Political parties supporting Greece's international bailout will begin forging a government on Monday after an election victory over radical leftists staved off the prospect of the debt-laden country leaving the euro and brought relief to global markets.

Back home, Desai says, a CRR cut today will be taken positively by the markets. "The policymakers are well prepared to counter the EU challenges," he says.

The Reserve Bank of India (RBI) is expected to cut interest rates on Monday in a bid to breathe fresh life into a sputtering economy even as inflation remains uncomfortably high.

According to Desai, any easing of liquidity tightness will be a positive. After cutting its policy rate by 50 basis points to 8% in April, the RBI had been widely expected to leave rates unchanged in June. But global and domestic economic conditions have deteriorated sharply since then.

However, a cut in the cash reserve ratio would lead to a knee-jerk rally, but could raise questions about the scope of further bond purchases via open market operations and lead to profit-booking.

All this cautiousness in the market is providing opportunity for long-term investment, believes Desai, who says, stock-picking remains the preferred strategy.

Desai remains bullish but advises buying only on declines.

"I think the market is forming a base for a durable long-term rally," he told CNBC-TV18 in an interview.

Below is the edited transcript of Desai’s interview with CNBC-TV18. Also watch the accompanying video.

Q: Do you expect a big relief rally, a major bout of risk on in global markets or do you think the Greece is in the price and should not move the needle too much?

A: We have got some of it. I think Greece was one event, there is Spain, Italy and there are too many things happening in Europe for the market to take one event and put on a lot of weight on it. Greece is a nice relief for the market, but Europe is still a developing story. So, the markets will be quite reticent as they have been all through this period.

Q: How much of a trigger do you see RBI action being from here on? Do you think that’s the one which is a pivot point or that too as the economist from HSBC was saying is not enough to drive the markets to some place significantly higher?

A: We are looking at a market that is trying to form higher bottoms. We did not go through the December low. The sentiment couple of weeks ago was really bad. So things have turned bad. The rupee had definitely gone to a new high, but the markets didn’t break the previous lows, so we have to pay cognizance to that.

If you get a CRR cut today, not that we are betting on one; then that would be read very positively by the market. The way I see this is that if you believe that inflation is behind you and that inflation pressures are going to moderate going forward then the move for the central bank will be to start easing liquidity in the system.

The fact that they keep liquidity tight is a signal that they are not totally convinced that inflation has peaked. There will be merit in that view because we have not seen all the signals so far in the right direction. For sure core is down and has been moderated for now several months it is sub 5% over the last three-four months, so that’s encouraging. But we also have a very sticky headline. We saw in 2010 that the headline eventually got back into the core.

So, the central bank will like to see that headline moderate. The fact is that the monsoon is a risk to the headline. I don’t think RBI is going to go all out and say we have won the battle against inflation, now let’s start easing liquidity. But if there is a signal that the market will love then that would be a signal saying that the liquidity tightness that we have faced for the past 18 months is behind us. I am not sure we will get that signal today.

Q: The suggestion also seems to be that in the second half it’s the defensives that will lose significant ground for themselves unlike the performance in the first half. How would you do this in terms of a portfolio stance in the second half of the year?

A: That is a function of valuation because you can make a call on the macro and macro doesn’t look good. It is unlikely to turn around in a hurry. It’s a slow recovery in the macro. The earnings outlook I don’t think is going to change.. The conviction in earnings cannot be really very strong at this stage. The key call is where we are in terms of valuations. As we have been saying - the valuations for the market are inexpensive. They are at levels which historically have yielded good returns.

So, that I think will continue to operate in the market. Now a lot of these traditional defensive sectors notably consumer staple stocks are quite rich in terms of valuations. That at any point in time when the macro shows some sign of recovery will hurt the performance of these stocks. Our view is that you have to be very stock specific; you have to be very selective when you are picking stocks in the sector.