Repo cut not enough, need govt action to lift market: Kotak

However, the market has far severe problems to be contained by just a rate cut.

Sanjeev Prasad, Kotak Institutional Equities warns that it may provide some amount of support and improve sentiment but clearly that has to be backed up by a lot of positive government action whether it is in terms of controlling the fiscal or reviving the investment climate. He feels that the market is likely to be rangebound barring some extreme events.

"I don’t think there is any great catalyst for the market either way to move up or down, there is some support from the central banks all over the world but I think the rally is getting capped by the fact that there is not much of an action from the governments," he explains.

As an investment strategy, he prefers BPCL among the oil marketing companies. Prasad also adds that rupee depreciation has capped downside of IT companies.

Also read: RBI won't ease significantly for 2 qtrs, says Franklin Templeton

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: What do you think the RBI may deliver? What can it do to the markets?

A: General expectation is RBI will cut interest rates. Most of the street seems to be expecting about 25 bps cuts, although some people are even talking about 50 bps. Our own view is maybe the RBI will leave it unchanged. That’s what our economics team is suggesting, given the fact that inflation numbers are still very high. The last data point, which came out yesterday 7.55%, is still way outside the comfort zone of the RBI. But given the clamour, which is there in India, at this point of time from industrialists, market, economists that the RBI should do something, the RBI could well go ahead and cut interest rates by 25 bps, policy rate by 25 bps.

Is that the salvation for the market that we are looking for? The answer is yes maybe it will provide some amount of support and some improvement, as far as sentiment is concerned. But clearly that has to be backed up by a lot of positive government action, whether it is in terms of controlling the fisc, reviving the investment climate. So, unless and until you see sensible governance coming back into India, I don’t think this market is really going to sustain.

You could see these booster shots from central banks all over the world and from RBI from time to time. But ultimately if global markets have to do well, somewhere the governments have to get their act right. That pretty much holds for India also.

Q: Everyone has been focused on this week, aside from the Reserve Bank of India (RBI), because of how big it is globally. How do you guys expect the second half of the month to shape up for the market, we have sort of held out up until now?

A: We will have to wait and see what happens to the Greece elections and what the outcome of that is. I think the base case, which you should assume, is that Greece stays inside the Euro zone and you don’t see an immediate break-up of the Euro zone. The problem, at this point of time, is you are seeing a situation where, on and off, you see good news and bad news. You have some sort of a range for the market. In terms of the floor, everybody expect central banks all over the world to do something, you have talks of QE emerging in the US. In Euro zone, people are talking about some sort of an LTRO starting once again, maybe injection of liquidity into Spanish banks has already happened. You could see similar things being done for some of the other weaker banks in the Euro zone. There are talks of some sort of a loose banking union. In India, you have the RBI maybe going ahead and cutting rates. So, maybe that provides some sort of a floor to markets.

On the other side, you have periodic bad news coming up. There is some governance failure somewhere, governments don’t seem to act. Germany will probably not relent in terms of lending far bigger support to the European Union as it is required at this point in time. So, there is a cap on the markets in that case. So, I think this market is pretty much rangebound between a combination of maybe some sort of good news, which comes from central banks and bad news from the political side or from the macroeconomics standpoint. That is as far as the macro is concerned.

Coming to India specifically, I think we will have to wait and see what exactly happens in terms of the presidential election. You have a lot of pressing challenges as of now. We are trading at a very high fiscal deficit, current account is a big problem. A big problem all of us are grappling with at this point of time is, ‘if the current finance minister becomes the next president, who is the next finance minister in that case and how quickly can he or she come on board and start tackling the problems which India is facing?’ So, I don’t think there is any great catalyst for the market either way to move up or down. There is some support from the central banks all over the world, but I think the rally is getting capped by the fact that there is not much of an action from the governments.

Q: L&T and Hindustan Unilever (HUL) are two stocks that have given relative leadership or strength to the market. What's your call on both of these?

A: It’s a very peculiar situation. On one side, you have L&T, which is pretty high beta stock. It is a stock that probably reflects the hope of the market that things will improve soon. On the other side, you have HUL, which is probably a very defensive stock. It reflects the belief that nothing will happen in the markets. That is what is probably happening in the market.

You have 50% of the market probably believing that things are getting worse, so let’s take a more defensive stance and hide into defensive like ITC, HUL etc. On the other side, you have some sections of the market saying that okay the worst is probably behind us. May be Euro zone will muddle through its problems, maybe in India you are seeing things bottoming out in terms of the economic news flow, maybe governance will start improving, so lets start taking a more aggressive stance and start taking some of the calls in infrastructure space, some of high beta names etc. So, we have a pretty peculiar market at this point of time. I don’t think anybody has a real grasp as to what exactly is going on and how things will pan out going forward.