Ball is again back in the RBI's court, says PN Vijay

Falling global oil prices as well as declining core inflation and growth in India give the Reserve Bank of India room to adjust interest rates, a deputy governor said, two weeks before a policy review.

Larsen & Toubro rose 3.5%, while Reliance Industries ended 1.5% higher. State Bank of India added 0.9%. (Read the full market commentary: HERE )

The markets fell into a very strong support zone between 4700 and 4800, explains technical analyst Sudarshan Sukhani. That support has held many times in the past, not for the last three months, but probably for many years.

So when we entered that zone , he says, the markets could have done anything. "That's why in the morning I have suggested that today is not a good day to trade and that suggestion was repeated at 12 noon. I am just saying this because we don't know exactly how the markets will behave but we know that they will behave in unusual ways," he says. 

"It is not short covering. It is probably genuine buying at lower levels,” he told CNBC-TV18 in an interview.

Also helping sentiment, India's monsoon rains are likely to hit the southern Kerala coast in two days, a top weather official said on Monday, easing concerns about the onset delay threatening plantings of summer crops such as rice, soybean and cotton in the farm-dependent economy.

In an interview with CNBC-TV18, portfolio manager PN Vijay spoke about his reading of all the day's important market-related developments and the road ahead.

Below is an edited transcript of Vijay’s interview on CNBC-TV18. Also watch the attached video.

Q: There is some amount of hope coming in after the comments that we heard from the RBI deputy governor on how the RBI may have window of opportunity to cut rates this time. How hopeful should one be and from a markets point of view? Do you expect to see any form of a base getting built here?

A: The market recovery substantially was because of the fact that people are now thinking seriously of a rate cut in June, which was never on the cards till say 15 days back and the fact that some sort of an official acknowledgement that came from the RBI deputy governor enthused people. There is tremendous pressure on the RBI to do something because we are seeing how difficult it is for the government to correct the fiscal situation.

They tired baby-step in the form of petrol price hike and then the whole nation went on a strike and that sort of thing. So, they need to be very cleaver in the way they cut the fiscal deficit because it has very grave political implications ahead of the presidential elections.

The ball is again back in the RBI's court. Very fortunately for RBI, oil prices have crashed and their own open market work on the rupee-dollar seems to be having some effect. Generally, there is some optimism that a rate cut or at least a 50 basis point CRR cut would be there, which would generally spur investment activity. The other point is that we saw the India’s investment to GDP ratio fell to 30%, which even during 2008 was about 32-33%. It means fresh investment is just not taking place. This is a very serious matter and it’s just a matter of time before your service sector gets affected.

All this, there is some amount of data to suggest that RBI could cut rates and that's flagging morale of investors up. We need to see how long it holds.

Q: There was a rally in yields at 8.31%. Lot of profit booking was seen today. Titan down 5%, Jubilant Foodworks down 6%, are you spotting this trend in the market as well?

A: Yes. Today, we are in a ridiculous situation where FMCG is quoted at 13 times earnings whereas they themselves are claiming nothing more than 15-18 times profit growth. That means they are at a peg of 1.5, which is a huge bull market peg for anybody.

On the other hand, auto and banking blue chips stocks are quoted at five times earnings. So there is a six time disconnect between say a Titan and Bank of Baroda. This is an opportunity for value investors. I am not surprised that people are exiting Jubilant and Titan and buying Bank of Baroda and Tata Motors. On a one year timeframe, the risk reward is clearly in favour of banks and autos stocks as compared to high priced FMCGs.

Q: Which stocks would you pick ahead of RBI mid-quarter credit policy?

A: I would take a cautious stand till 22-23 June. I will not increase exposure in anything. If Greeks does not vote for a bailout, next day the global markets will go down 10%. In the upcoming Fed meeting there are hopes of QE3 after last week disastrous job data report. Global environment is still not clear, be it Greek elections, upcoming Fed meeting, Germany backing common guaranteed euro effort and upcoming RBI policy.

Each of these factors can give 5% swing to the market. Should I buy Bank of Baroda just because it’s available at Rs 625, I would rather buy it at Rs 710 after getting some resolution as all the factors are very serious. I don’t have any plans for fresh buying before June 20.

Q: With crude at USD 96, which stock would you pick?

A: Banks and auto stock are a good bet because they have high beta value. Lower crude means better rupee value and low current account deficit which boost the market.  When crude goes down inflation and current account deficit reduces. We had the lowest current account deficit in 12 months. People are glossing over the good news and this may be fantastic for India. This crude movement may even lead to zero current account deficit. I would play rate sensitives which will help to get a direct benefit.

Q: What is your view on Asian Paints ? If someone has the willpower to take a call or has the money to enter into Asian Paints would you see further upside from current Rs 3,680 level?

A: Not in the immediate-term because Asian Paints is a bluechip. Asian Paints is not the best Indian FMCGs company. Asian Paints has a strong balance sheet, strong growth, strong market share, but for value investing the risk is more. It is almost like ITC or Hindustan Lever in my portfolio management. I would not buy Asian Paints incrementally unless I want to hide somewhere for safety in that case just like I pick ITC, I will pick Asian Paints.

Q: What are you making with regards to the revised estimates of all the economists on the GDP forecast? Which one is most likely?

A: I have a very poor view of all Indian economists because they have got it wrong all the time and they are six months behind the time. I have lot of respect for some of the other economists in the country like Montek Ahluwalia and others. The general feeling is that the GDP is being downgraded. I don’t agree, especially after 20% fall in crude prices. I think India is back in the ring and could surprise on GDP given the strong reverse correlation between strong commodity prices and India’s growth.