Risk reward turns favourable at Nifty below 4800: UBS

However, bankers expect RBI to cut cash reserve ratio by up to 0.50% in its policy review on July 31 even as drought is staring at the country which could fuel price rise.

Bankers are looking at a reduction in the cash reserve ratio (CRR) and not a cut in the key lending rates - given the piquant macroeconomic conditions and the stubborn price index, though privately most of them admit that the Governor has no leg-room to heed to their demand.

While GDP growth hit a nine-year low last fiscal at 6.5% last fiscal, inflation remains high at 7.25% for June.

RBI left policy rates and CRR unchanged at the last meeting on June 16, arguing that there is tangible evidence that higher interest rates have led to growth slowdown.

Chhaochharia expects macro data points to be weak over the next two quarters. "We are advising investors to remain defensive at the moment," he told CNBC-TV18 in an interview.

Chhaochharia says he remains cautious on PSU banks, citing further downside risks. Instead, he prefers consumer staples and pharma among defensives.

"The risk-reward turns favourable at Nifty below 4,800," he says.

Below is the edited transcript of Chhaochharia's interview with CNBC-TV18.

Q: What are your expectations from the Reserve Bank of India (RBI) tomorrow; do you think the stock markets should expect anything?

A: No, not really. I don’t think RBI will cut rates tomorrow. We are not expecting any. I don’t think the market is also expecting any rate cuts though there is small section of the market, which is hoping for some kind of positive RBI action. RBI’s commentary in the last two-three weeks is very explicit in terms of putting the onus on the government to look at any further monetary easing, so very unlikely.

Q: I read in your note that you have written that the risk reward is unfavourable now and it is good to be defensive, can you elaborate on how one should position their portfolio?

A: When we say risk reward, it basically means that the market is trading and what the earnings quality and earnings outlook is. One of the common comments we hear from a lot of investors also is that Indian markets look cheap compared to history.

They are trading at 12.5-13 times P/E multiple versus historical average of 16 times, which in our view is just optically correct. It does look cheap compared to history but the current earnings quality and outlook is very different.

One, earnings growth is significantly lower than what we have seen in those periods of higher P/E multiples. Secondly, earnings quality is very inferior in terms of ROEs, in terms of cooperative leverage, they are significantly inferior in what you have seen in the past. So in that context, you cannot compare the historical averages to give a fair value multiple.

In our view, looking at the current earnings profile, the valuation looks fair. So it is not building in any buffer for any downside from weak. Weak macro data point is a likely event for next couple of quarters that will continue and that could drag the markets down on a bottom-up basis.

But having said that, India will benefit from global risk-on trade, but beyond that from a local market perspective, I think the risk reward is clearly unfavourable. Therefore, we recommend a more defensive kind of portfolio where we focus on the defensive sectors and secondly also more on stock focused rather than leverage ideas.

Q: The sector that has got punished the most these last few days is the public sector banks where numbers have been quite disappointing. I see Bank of India in your least preferred list. Are you guys also very cautious on that space?

A: We have been cautious on government banks both top down as well as bottom up and the reason being that again the banks had a reasonable rally up from lows. They look very cheap compared to history, but the quality of the book etc is not comparable to what we saw last few years. Therefore, the risk reward makes sense and we may have been bearish on them and there is potential downside even from current levels for those banks.

Q: What would the approach be towards the auto sector now, you have Tata Motors as well in your underweight list, how would you approach that?

A: Tata Motors still remains an underweight call for us both the international business JLR, the expectation still remains ahead of a reality in our view. Secondly, the local business also is facing headwinds because of continued slowdown in macro while the valuations of the company is actually at a premium to some of the global auto majors. That still has risk to the downside in our view.