RBI policy pragmatic; macro woes to pull mkt lower: Expert

India’s economic situation is not exciting and inflation continues to be a very large concern, but the RBI has announced a balanced and pragmatic policy, Tushar Pradhan, CIO, HSBC AMC said.

The policy announcement didn’t auger well for the market and it corrected. But, Pradhan feels going ahead market will take cues from the fact that RBI is quite accommodating from a growth point of view. He further added that from valuations perspective, the market has not hit the bottom yet. "We should see markets trade in a range before we take any direction. But looking at the overall economic cycle, we are closer to the bottom rather than closer to the peak," he told CNBC-TV18 in an interview. Also Read: Reaction to RBI move kneejerk, liquidity key driver, says IIFL Below is the edited transcript of Tushar Pradhan’s interview Q: What is your sense on how the markets have reacted to the credit policy and more importantly how it will move from here? A: It is quite a surprise in terms of what the market was thinking given where we ended yesterday. The cues came from the Federal Reserve policy and the statement. So, the expectation was that would be a continuation in terms of what we expect on the ground here. What has come across is the fact that domestically the environment is much different, inflation is very benign elsewhere in the world while in India inflation is a very significant concern. We have to calibrate all the moves, which have happened in the past in a way that it doesn’t disrupt what has been done. So, no need to undo everything, which was very critical to be done two months ago right away. In a sense it is a very balanced move and we think in the way the policy has been stated, it is very pragmatic. But markets will do what they have to do. The exuberance which was displayed yesterday has very correctly come off. We are in an economic situation which is not exciting. We do need to kind of be aware of the fact that inflation has a very large concern in our economy. After the markets get adjusted to the new normal, they will also see the fineprint that the Reserve Bank of India (RBI) is quite accommodating from a growth point of view and we should see the market again take cues from it as we go along. So, we will hope that the market will recover in the later half of this year. Q: Your take, you sell banks now? A: We don’t make decisions clearly on just one monetary policy in that sense we hopefully take a much longer view of the economy. We all understand that the asset situation with most banks especially public sector banks is the large one. If at all we get some sort of indication that the environment is getting a little better, banks clearly are the proxy for a bounce back in the economy after the cycle hits the bottom. So in that sense it helps to be a little contrarion and to see whether now after the adjustment on valuations bank on a more adjusted basis going on a longer-term basis are more attractive as a result of the price action rather than saying now this is the time to sell banks. So we do have a little bit of a different view in terms of how we see them. However, the headwinds for the economy continue to be there. It is not a very easy environment for banks to pass through. So one would be circumspect, could obviously some banks better than the other. So I will take a very clear view across this sector as such, but clearly there are certain banks which would do better versus others at this time. Q: Where does the market find a bottom at all you think, this is it 500 points trade off or do you think the market is now going to worry about growth, worry about even Q2 numbers and we have seen the peak for the moment? A: I would tend to agree with you that this is not the bottom when it comes to valuations because it is as if it is at a steep discount and this 500 points drop is not the end of it. We see that the economy will go through a lot of stress even going forward. Q2 numbers as we all know by now are going to be probably the worst numbers that we will see for any quarter for this financial year, which means again there will be some pain as and when we see those numbers come through. In addition to that, there are no levers left in terms of trying to push growth forward either by way of very consorted reform push or through the monetary policy. So things seem to be challenging and we should see markets trade in a range before we take any direction. But if you take the overall economic cycle, we are closer to the bottom rather than closer to the peak is where I would sense the markets to be at. Q: Did you read the one more repo hike is there. In that case how will you deal in the bond market? A: My earlier impression was that he will stick with 200 bps. But he is clear in his mind that he wants to bring it down to 100. This 100bps is not going to happen with MSF coming down especially in an environment where the inflation is expected to continue to be on the higher side. Whether or not the gap will be reduced on account of MSF or not, it is entirely a function of how we see inflation play out over the next few months. Given the fact that inflation is going to continue on the higher side, some degree of repo rate hike is required whether it is 25 or 50bps and I think that is what we will do. The justification of repo rate hike would still be what we have heard today – even if there is a repo rate hike, the fact that there is reduction in the overnight rate, it still cheaper for banks to borrow money. So, the justification would be still that the rates are coming down but not necessarily by the entire coming down happening through MSF rate.