Banking may lead mkt; growth concerns remain: Edelweiss

Markets have rallied and sentiment has improved on the back of strong domestic and global cues. On the one hand, the US Federal Reserve has given its nod for a third round of quantitative easing and back home, the government has finally decided to increase diesel prices by Rs 5 per litre. Vikas Khemani of Edelweiss Securities feels fiscal consolidation will give comfort to the market and will reduce any risk of possible ratings downgrade.

Further, Khemani adds that the Fed action on Thursday has created some risk on trade and risk appetite in the market is likely to increase. However, he is concerned about policy paralysis and other concerns plaguing the domestic economy.

According to Khemani, in a scenario like this banking could well be the sector that provides direction to the market. As the downside to the market has moved up, instead of looking at levels of 4800-5000, the Nifty would probably hover around 5200-5300 levels now, he feels.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Is the move on fiscal deficit, the curbing of the number of cylinders that will be given subsidized as well as the expected moves on divestment enough to give the market some more legs in the rally?

A: I think currently markets would be looked at in light of both global as well as local development. I think locally fiscal consolidation gives a good comfort and also it reduces the risk of any possible rating downgrade. From that perspective, it augurs well for the domestic markets.

Also what has happened recently with ECB and Fed action last night, I think all these things are at least creating some amount of risk on trade and some more risk appetite in the market. I think liquidity scenario would be easy. To that extent, I feel that market can still have some leg.

Having said that, still you have worries around the domestic scenario, policy paralysis and concern over what is going to happen on the asset quality issue of the banks. All these issues continue. But, obviously if liquidity scenario improves, risk on trade comes about, then I think it definitely eases the pressure on the system and I think that is likely to happen.

Q: Are you recommending investors to invest in the Indian equity markets with the Nifty above that 5500 mark and if yes where would you recommend?

A: If you are in the markets, how do you select your stocks and how do you put money in which sector? Currently, if you see one sector which is going to be critical in terms of deciding the market direction would be banking. We have had a polarized market for some time and defensive stocks have been very expensive and banking is a sector which holds the key.

I think we’ll have to watch out what RBI action is there, how the interest rate scenario comes about. Also in my opinion, these quarterly numbers would be very critical to watch out on asset quality front. If we see a disappointment on that front, I think probably banking stocks can continue to remain weak.

In my opinion, still the dark clouds are not yet away, the overall sentiment has improved and I think that will take across the board kind of rally in the market and which is what we have witnessed today. We’ll have to wait and watch to see how the banking sector behaves in light of the new developments, what kind of numbers they report in the quarterly earnings.

Q: Would you say that the markets downside has definitely moved up now with the government at least putting its front foot forward in terms of some policy decisions?

A: I think these decisions are kind of compulsive ones. If they did not take these decisions, we had a very big risk of ratings downgrade and there were other implications also.

I don’t think they were taken out of any proactive policy mechanism and I don’t see a proactive policy mechanism environment getting created in the Indian politic right now. I don’t think these are enough to build confidence in the Indian markets. But having said that, keeping in mind this development and other global developments, I would agree with you that the downside in the market has moved up.

Probably you will not see 4800-5000 level which was earlier expected. It will probably be around 5200-5300 levels on Nifty.