RBI may up rates by another 25-30bps, sell autos: Baer Cap

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In a bid to tame rising inflation, the Reserve Bank of India (RBI) raised key policy rates (repo and reverse repo) by 50 basis points each on Tuesday. But this didn't come as a surprise to Alok Sama of Baer Capital, who said, "Inflation is now heading towards double digits, which is way above the central bank's comfort zone of 3-4%."

Since March 2010, the RBI has tightened policy rates 11 times (including the latest hike). "Cumulatively, the repo and the reverse repo rates have been upped by 325 and 375 basis points respectively with no significant impact on inflation, suggesting that other monetary policy tools tinkering with cash reserve ration (CRR) and statutory liquidity ratio (SLR) are called for," Sama stated in an interview to CNBC-TV18.

Going forward, he sees the apex bank hiking rates by another 25-30 bps to maintain its anti-inflationary stance.

Further, Sama is relatively constructive about the market. "More than local, global macro headwinds are likely to affect fresh cash flows, thus, triggering weariness in sentiments. However, the fall in key benchmarks have made valuations attractive," he said.

In rate sensitive stocks, while he is optimistic about banks, Sama believes that one should avoid autos as it is likely to reflect the negative impact of interest rate hikes.

Below is the verbatim transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. 

Q: The game changer for the market sentiment has been the 50 basis point rate hike. Did that surprise you?

A: Not actually. The last time I came on the show, which was in May, we talked about expectations for the rest of the year. At that point, I am pretty sure we stated that the rate hikes for the balance of the year would probably be ahead of what the market expectations were.

So, that's proved to be the case. It shouldn't surprise anyone. You have got a situation where inflation is close to double digits, which is way above central bank's comfort zone of 3-4% range. So you would expect them to be move aggressive in their anti-inflationary stance. The element of surprise is always worth a lot when it comes to monetary policy moves of this nature.

Q: What has got the market worried also is that apart from the rate hike, the tone from the RBI didn't seem to suggest any end to this cycle. What is it that you expect to see on the tightening front for the rest of the year?

A: We expect at least another 25-50 basis points hike. You rightly said that the tone has been fairly hawkish, thus there are couple of things to take into account: Since the tightening cycle began, RBI has raised rates by close to 325 bps and there has been no meaningful impact on inflation, which would suggest that other monetary policy tools tinkering with the CRR, SLR is called for and one may see some action on the front.

The other wild card is change of leadership at the helm of RBI in September, which I won't make a difference. But certainly, expect the overall tone of monetary policy stance to be fairly aggressive, even if it comes at the expense of growth in the near- to medium-term.

Q: So where do you stand on the market now? Are you still optimistic, or, do you think the upsides are capped given all these macro headwinds?

A: There are not many macro headwinds in India. The issues with the market are more with respect to global flows and that's a much more complicated discussion. We are quite constructive on the market. Our portfolio positioning is reasonably conservative. I think we are 74% long and the only reason why we have abstained from increasing our long positions is weariness with respect to what's happening globally.

With respect to India, we think the market at these levels (sort of 14 times prospective earnings) is reasonably valued.

Read: Deven Choksey sees Nifty inching up once US debt crisis ends

Q: The fear is that the market maybe at the risk of testing the lows it has seen at some point this year. Do you believe that there is a chance the Nifty going back to that 5200-mark?

A: I think it will. As I said valuations are now at a level that certainly we are quite comfortable with. We are looking to add to our long positions.

Q: Since the day of the policy review, banks and autos have not done well. Are you seeing this as an opportunity, or, are you skeptical about how these stocks might do going forward?

A: Banks have been hit fairly aggressively. So we think they are sensibly valued and even cheap. So we are not looking to add to our positions with respect to banks.

With respect to the auto sector, we are much more circumspect. The flow of negative news with respect to inventory built-ups will probably surprise the market a little bit. So we have been sellers of the auto sector.

Q: What have you made of the earnings season? Are you in the camp that believes it has been more disappointing than people expected it to be?

A: I don't believe so. There were no real surprises in the Indian earnings' picture. They reflect the reality of the situation, which is rate sensitive-sectors have taken a hit. However, the overall picture with respect to the economy is reasonably robust. Meanwhile, from a valuation perspective we are certainly constructive.

Q: ITC's numbers looked good yesterday. Do you think it may still make sense to hide in some of these defensive sectors?

A: In our portfolio, we are overweight in pharma and FMCG counters, which are fairly defensive bets. IT services is the third sector where we are largely overweight on.

Q: What about the capital goods space? Is there a value story to look at there?

A: We are finding value in capital goods sector stocks. The fact that rates have been rising is no longer news and those stocks have been beaten up pretty badly. So, we actually do see values in the capital goods space and L&T for specifically as a counter where we have built up positions.

Q: How are you positioned in telecom now because we have seen a good rally in many of those stocks after the recent news events? Do you think it makes sense to back that sector even from here?

A: We would agree with that. The worst seems to be over for the telecom space. Bharti, for example, is one of our top picks in terms of positions that we are building aggressively. Things have bottomed out with respect to the telecom space and we are looking to build that.

Q: We haven't done too badly in terms of flows this month. We have closed with a largish positive of more than a billion dollars. What is it that you hear about flows and and what's happening with the rate hikes?

A: Global risk appetite is almost a daily scenario. People are very focused on what's happening in the US. If the flows are good, the news is good, as you saw with respect to the relief rally following the EU Finance Ministers meeting in Brussels. These factors are driving the markets; India as well as the western world.

Q: The immediate event, of course, is the US debt sealing issue. How do you see that being resolved and the impact on markets like ours or all equity markets?

A: In terms of the way things are unfolding, one would probably see the debt limit increased in the next few days. But that's not a major worry. Considering the treasury market, nobody is really expecting US to default on its debt. At this point almost inevitably, one will see a credit downgrade for the US.

The market, ratings agencies and the world at large is looking for a medium to long term solution that addresses the fundamental balance sheet issues and the fiscal imbalances that exist in the US. This needs to be addressed and right now you have a clear split along classic ideological lines in terms of left wing  and right wing; whether you cut back on entitlements spending and to what extent to increase taxes.

The reality is that both need to happen and that saga needs to unfold till people get comfortable with the events in the US.