India almost out of woods on rate hike cycle: Baer Cap

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After the strong positive sessions that we have had, India might look to outperform due to its strong fundamentals, says Alok Sama, President and Founder of Baer Capital Partners. While all may not be smooth sailing, he says, "Our economy is not quite as geared as say the Chinese economy might be to what is happening in the western world.

Inflationary pressures continue to mount worries on investor foreheads. Whether the central bank pauses or takes the rate hike route, it is a positive outlook for India. On India's rate tightening cycle, Sama is of the view that the end is almost near.

Below is a verbatim transcript of his interview's with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. For complete details watch the accompanying video.

Q: How are you reading this pullback from 4,700 to 5,100-5,200? Is it a dead cat technical bounce or do you think it's a far more durable period of reconstruction?

A: I wonder if I can call it a dead cat bounce. Let's get beyond the day to day volatility in the market. There are some fairly fundamental issues with respect to global macro. Unfortunately, there doesn't seem to be any resolution in sight in the near-term. Until those uncertainties go away like the issue of sovereign debt in Europe and there is a vicious cycle in play here which is the issue of growth and if we are headed towards a double-dip recession.

Those are very significant issues and related to the first issue, it is potentially the banking crisis in Europe. Those are not issues that are going to be resolved in the next few days. Maybe, unfortunately, not even in the next few weeks or months. As a result, you will continue to see a fair amount of volatility in these markets. India may outperform but that is not to suggest it is smooth sailing from hereon.

Q: The next big event is the RBI meet. What do you expect to hear from there? Are you sensing any greater interest in India in what could possibly be a pause meeting?

A: Yes, that is one reason. The reason India might outperform is because fundamentally, at least to a degree the economy is not quite as geared as say the Chinese economy might be to what is happening in the western world. The interest rate cycle or more broadly the issue of inflation has been a big concern with respect to India. Where we are right now is we are probably at the end of the tightening cycle in terms of where the RBI is.

With a potential softening of commodity prices and crude oil prices, which hasn't happened yet which I am little bit surprised by but given the global economic outlook that is something that is likely to happen. That helps the cause from the RBI's perspective in terms of easing inflationary pressures on the economy.

Credit growth has slowed down somewhat and it is reasonable to expect the RBI to perhaps take a pause. They may choose to increase rates again next week but whether they do that or not I think as we are at the end of the cycle, it is positive for India.

Q: How are you approaching India now? Is it a good time to go high beta versus defensives?

A: No, we are definitely not going to be aggressive at this point in the cycle given the global issues. Global macro overrides and the right way to play India is the selective opportunities. For example, we think we are probably towards the end of the interest rate tightening cycle. We are beginning to see opportunities in the capital goods and the infrastructure space and maybe even real estate.

There are selective opportunities but overall, this is not a time to be a hero with respect to being maximum bullish on the index. Given the global macro headwinds, one needs to be very cautious over the next few months.

Q: We have seen some flows pick-up in the last few days. How are you gauging risk appetite given what is going on in Europe and the US?

A: The big issue is risk appetite generally and the bigger issue is relative to the situation in Europe which has implications for the health of the banking system, clearly, the European banks. You have the derivatives market, the CDS market, the global financial system and the interrelationship is quite complex. One has to be cautious about the impact on the US banking system as well.

That is a bigger issue and a bigger cause for concern. But the US is something that you could wrap your arms around. You have got the possibility, some would say the likelihood of slower growth but at least one understands how to deal with that. With respect to Europe, there is a tremendous amount of uncertainty as to where we are headed over the next few months.

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