'Monsoon, lack of govt action & FII outflow worrying mkt'

Heading in August, worries are that we may have to weather through weak monsoons this year, adding pressure to the economy’s already sluggish growth. Poor rainfall will hurt agricultural growth, which further raises inflation and the ability of the Reserve Bank to act on interest rates. This is one of the biggest worries for the market, says Dalal.

However, he believes lack of action from the government on reforms, and weak cues from Europe can also trigger a crash in the market. “In terms of index movement can come down to 4,800 or even 4,500 if there is sufficient FII selling taking place,” he said.

Below is an edited transcript of his interview with Udayan Mukherjee and Sonia Shenoy.

Q: What do you make of this recent divergence performance between public sector undertaking (PSU) banks and private sector banks in the light of the numbers that have come out today?

A: If you take the last two years, the private sector banks have been outperforming the public sector banks substantially. The main reason for that has been that they have been very cautious in the way they are going ahead with their book expansion and in the way they are lending to various industries. Even though there are certain risks attached to the private sector banks’ books, for instance there is a concern about the infrastructure book Axis Bank is carrying, but it’s a lot better than the public sector banks. The public sector banks’ value correction has been enormous in the last six months, or at least in the last three months, and is now reaching levels wherein they will bottom at a certain price. They will perhaps not have to erode more value even though the bad news may still come in terms of the gross NPA expansion.

The upside that one can see in public sector banks is that the government has started act upon the two major sectors which have cause the greatest disruption in gross NPAs, and that’s airlines and electricity boards. The electricity boards will come first, and hopefully that will happen in the next quarter as soon as the finance ministry gets it act together with what it wants to do going forward. And if FDI in airlines is announced, for which we have been waiting for last six months, I think the biggest relief will come to banks in that regard.

Q: So if you are hopeful about PSUs, is that a space that you would buy into at this level and would you buy into the frontline PSU banks or the midcaps?

A: I would wait some more time because the price erosion is still on. But if they are going to reach 0.5-0.6 book going forward, if we do see restructuring taking place and if the economy starts moving on a positive front by FY13-14, then I think definitely you have to start looking at PSU banks at some point of time.