SENSEX NIFTY
Apr 17, 2012, 10.56 PM IST | Source: CNBC-TV18

Nifty may see 5350, be overweight on equities: Axis Direct

The Reserve Bank of India (RBI), in its annual monetary policy for 2012-13, slashed the policy rates by 50 basis points. In an interview to CNBC-TV18, Nilesh Shah of Axis Direct says, it is a bold step. “In the overall gloomy scenario, this is definitely a silver line which markets would like to catch on,” he adds.

The Reserve Bank of India (RBI), in its annual monetary policy for 2012-13, slashed the policy rates by 50 basis points.

In an interview to CNBC-TV18, Nilesh Shah of Axis Direct says, it is a bold step. “In the overall gloomy scenario, this is definitely a silver line which markets would like to catch on,” he adds.

He thinks market will make a fair attempt to breach 5,300 or 5,350. “It will make sense to be overweight equities because valuations are in your favour,” he adds.

Also read: India may not grow better than peers in '12, says Morgan Stanley

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: What do you think? Should you takeaway the fact that this is it for the moment, given that RBI is talking about limited space for more easing or do you think it’s just sounding some notes of caution? In the next three-four months, we could expect some more rate cuts.

A: I think this is a bold step. It will be welcomed by market which was kind of running short of positives to hang on. In the overall gloomy scenario, this is definitely a silver line which markets would like to catch on.

The language of policy clearly states that there is limited room of maneuverability on cutting down rates further going forward. So, unless and until the scenario or variables change, markets probably will not be expecting too much of rate cut. So, certainly this step will give confidence to the market that atleast something is turning positive for the overall growth and economy.

Q: How do you approach the market, are you having a buy on banks?

A: Definitely market was full of negative sentiments post Budget on unnecessarily controversy on General Anti-Avoidance Rule (GAAR) and other subjects. Clearly, they were looking for a silver lining. A bold step by RBI for 50 bps rate cut provides that. Now markets will be definitely having some positive sentiment. If the chain of events continues to work like what RBI has done, certainly we are looking at better days ahead.

Q: What is the approach to the markets now? Would you be positive on all rate sensitive? Now looking at this kind of an RBI, do you think that the market’s ceiling of 5,300 or 5,350 could now get breached on the strength of the RBI’s statements?

A: I think market will make a fair attempt to breach that, based on what has been proposed in the credit policy. One, the surprise rate cut itself is positive. Second, the availability of liquidity for the banking sector is also positive. It will help them increase their margin or pass on the rate cut to the borrowers or in turn help recover the growth.

Third, with this kind of benevolent mood, probably market will also expect early resumption of open market operations by the RBI. That is the only point which is not mentioned in this credit policy.

All these things put together, one, could assume a slightly lower level of tightness in liquidity, more like plus and minus 1% of net demand and time liabilities (NDTL), which RBI has been talking about.

Secondly, a slightly lower level of yields on the government borrowing programme and whenever they will start moving up, probably it will be intervened by the RBI’s OMO. So, one could assume a little bit of lower level of yields on the government’s borrowing programme as well as the other corporate borrowers.

All these things put together will be positive for growth as well as corporate earnings, which will allow market to make the serious attempt to break from the current level and tend to go higher. Obviously, what happens going forward in terms of European Union and Spain, what happens on oil prices will continue to play a role. But today’s policy does give incentive and support to the market to make an attempt to go higher.

Q: You have long been a mutual fund manager, what would be the best position to get into? Is it time to switch out from fixed income and get into equities you think?

A: I think one cannot substitute equity for fixed income, but certainly at this point of time, it will make sense to be overweight equities because valuations are in your favour. Probably we are going to see over next whole year improving macro compared to last year’s growth should bottom of this quarter will start inching up, interest rates should start coming down as we are speaking and should continue that. liquidity should be better.

Hopefully, currency will remain stable with all these steps. This creates a foundation for better corporate earnings in FY13 compared to what was the scenario in FY12. That is where it is fair valuation. Overweight equity will be positive thing. In fixed income overweight duration will be a appropriate call, rates have come down and probably they can continue to come down a little bit more. So, within fixed income overweight duration, between fixed income and equities overweight equities that should be good allocation for investors.

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