5100 under threat if RBI disappoints on rate cut: UR Bhat

As the market builds hopes on the government for policy initiatives, Bhatt is of the opinion that if there is no interest rate cut on July 31, the last bit of hope that the market was resting on, will also collapse, and therefore, 5100 on Nifty might be under threat.

All those who played it safe for the last couple of months, are laughing all the way to the banks. All those who said it’s time to take risk and we should wait for some dramatic improvements in the economic environment, have come to grief. Therefore, it will be more of the same, more of allocation towards the safer and less volatile sectors and people will probably go slow on taking more risk on their portfolio,” Bhatt said.

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

Q: Has more uncertainty been injected again because of the global news of the last few days?

A: Absolutely. With the way Spain has been going and with the Troika sitting with Greece and the outcome of their assessment being very uncertain, there is further pain coming out of Europe. The risk appetite has come down even further. In India, we have the uncertainty on the political front which continues to ebb the market. With slow growth, high inflation and dysfunctional politics, weak earnings as we have seen for the June quarter, there doesn’t seem to be much of a tailwind anywhere.

Therefore, the market is doing the right thing by being somewhat negative on the expectation front. In July, we have had FII inflows in excess of USD 1.5 billion but still the market has come down by about 4-5%. Even huge amount of inflows that have come in July have not had much of an impact on the market. Therefore, all bets are off as far as the market is concerned at this stage.

Q: Would you be surprised if 5100 holds out or do you think despite the negatives, the market may still grind in a 5100-5400 kind of range?

A: The level of the market suggests that there is still lot of hope on policy initiatives that might come out of Delhi. The last bit of hope is on the rate action on July 31 and there are some people who think that the RBI can be arm pushed to reduce interest rates, which going by the commentary that they have been giving in the various interactions they have had with the media, it doesn’t look likely. So if there is no interest rate cut on July 31, I think the last bit of hope that the market was resting on, will also collapse, and therefore, 5100 might be under threat.

Q: Do you think this kind of money flow that you alluded to through July which primarily has been coming in because other BRIC markets have not been doing very well. This kind of relative game might continue even if we do not deliver on policy for the next couple of weeks?

A: Somewhat unlikely but very certainly a lot of effort to ramp up returns in the international markets. Therefore, there is hardly any return coming out of the fixed income market as most big economies have interest rates close to zero. So, there is not much money to be made there. The big pension funds and the likes have a huge negative NAV impact on account of this.

Therefore, they are trying to ramp up in returns by slightly raising the level of risk. But given the state of the Indian rupee on net-net dollar basis, their returns have not been good while they have been trying to test whether they can still make money out of emerging markets including India.

There are indications that they might be giving up on that. So therefore inflows are not something that we can bank on going forward. So it has to be something dramatic that India should do different from someone else and that is when there might be some interest generated in terms of investing in Indian market.

Q: How do you assess the global situation? Do you think the news from Spain, Greece etc now is about to inject a significant period of risk-off where we will see a capital outflow from many markets including ours. Could we get into that kind of mode again?

A: I think so. All indications are that things would be getting worse in Europe. The Troika assessing the situation in Greece is unlikely to have good things to say about them because they have not done any privatization, which is probably one of the most important things that was supposed to have been done.