Beware! Nifty may test 4,800 if RBI disappoints: UR Bhat

Though the Indian market is raising expectations for a deep rate cut, there is also a gnawing fear that it may slip drastically if RBI disappoints on June 18. Hopes are already building up that the central bank may slash rates by 50 basis points to pump enough liquidity.

However, UR Bhat, MD of Dalton Capital Advisors is worried that the market may again fall to 4800 if RBI fails to please the street by its monetary stance.
In an interview to CNBC-TV18, he said, "4,800 is from where we started the 4-5% current rally. That is probably insight if RBI disappoints on Monday. Again the political realignment as a run up to the presidential election raises risks for market. I think 4,800 is a reasonable level of support but if for example RBI is able to surprise the market on the positive side then I think there could be some more jubilation in the market."
He also adds that easing by central banks in developing market will lead to equity rally.  As an investment strategy, Bhat advises to use rally in banks as a good exit opportunity. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying videos. Q: Sunday is an important day. What do you think the market has priced in on the Greek elections?
A: I think the market has priced in a magic wand that the RBI is going to wave on Monday. There are enough problems that we have on the political side, economic side and on the policy side and yesterday’s move about the presidential nominee has brought one more layer of political uncertainty onto these problems that we already have.
In Greece, on Sunday I think all bets are off in the sense that any outcome is possible. But initial indications are that it is not going to be dramatically different from what happened a couple of months ago. Therefore, as far as uncertainty in Europe is concerned, it is probably going to rise and Spain is in worst position than what Greece went to election with.
Therefore, I think the amount of uncertainty that we are seeing in the market is increasing dramatically. The 4% rise that we saw month-to-date in the market to this month is largely based on the hope that RBI can solve all our problems. Q: A lot of global market watchers are pointing out that come July there is probably going to be another wave of selling which will limit all these gains we have seen so far. What would be the likely outcome over the course of the next few weeks for the market in terms of upside potential or a deep correction?
A: Upside potential is somewhat limited, given what is likely to happen and the sort of pain that is going to come out of Europe. I think the news flow from Europe is going to be continuously bad as far as the markets are concerned. Domestically, we have the presidential election coming up and so there is likely to be some more political realignment.
Therefore, that is going to add one more layer of uncertainty to the market. In addition, you have problems, whether it is on the fiscal side or on the interest rate inflation side. We are really settling down to a low growth, high inflation sort of cycle and breaking out of that is going to be very difficult only through monetary means. It needs government intervention and that is what the market expects for it to really go up dramatically from here. Q: Do you think the RBI will deliver on market expectations on Monday?
A: I think the expectations are far ahead of what RBI can deliver as of now, given the 4-5% increase that we have seen month-to-date based on the policy action that is going to come on Monday. I think unless RBI cuts CRR dramatically, by more than 1 percentage point or something like that, the market may not be satisfied. That is something we need to watch very closely. Also read: 50 bps rate cut to push Nifty towards 5300-5400: Baliga Global events important than 25 bps repo cut: UBS India
_PAGEBREAK_ Q: Is the market ahead of itself given the data points of the last couple of weeks? You didn't sound very optimistic about near-term prospects?
A: It looks like that because the market is having a touching faith on the outcome of Monday's RBI policy meeting. That is the only straw for the market to hold on to because there is no positive news coming out of anywhere, as far as market fundamentals are concerned. Therefore, I think there are a lot of hopes on that.
I suspect the monetary policy can do enough to change the direction of the economy dramatically at this level. What is needed is not that half percent or one percent tweak in interest rates, policy action in terms of giving approvals for stalled projects, but doing something about the resource allocation policy and about oil price hike. These are the issues that need to gather momentum for the market to look up.
You have a situation where the 4-5% increase that we have seen month-to-date in the market is largely based on non-institutional buying. Institutional buying, whether it is FIIs or domestic have been very marginal. Therefore, there is quite a lot of interest from speculators as far as this particular rise is concerned.
That is predicated on dramatic action by the RBI on Monday. If that doesn’t come through, I think there is a distinct possibility of  some correction. Q: If that is your call, how deep do you think the downside risk is for the market because we have the short sharp rally? Do you see the market getting back to 4,800, going back all the way to 4,500 as was once feared, what is the downside risk here?
A: As of now, I think 4,800 is from where we started the 4-5% current rally. That is probably in sight if RBI disappoints on Monday. In the run up to the presidential election, there is some sort of a political realignment which raises the risk as far as the market is concerned.
I think 4,800 is a reasonable level of support but if for example, RBI is able to surprise the market on the positive side, then I think there could be some more jubilation in the market. Q: Either way, do you see the market post the results of Greek elections, RBI policy and the 20th Fed meeting making a move to go back to the February highs of 5,600 or do you think that will not be fundamentally warranted?
A: That is not fundamentally warranted given the level of uncertainties that we have. Even as far as US is concerned, what was initially looking like slightly incremental positive data flow coming up, has now turned somewhat negative; whether it is the employment situation or the retail sales numbers.
Therefore, there is not so much of a fillip coming out of the US and of course in Europe you have nothing but grief. On the international side also, there doesn't seem to be too much of a risk appetite, which is what most foreign investors think of when they invest in India.
There is no great support coming out of foreign investors, there is no great moment as far as the fundamentals in the Indian economy and banking are concerned. All our hopes on rate action from the RBI is not something that is going to end up with great relief as far as the market is concerned. Q: What should the market's takeaway be from the political episode of yesterday? Do you think there is a genuine threat of Federal government kind of structure coming up after the meetings between TMC and the SP or do you think that is an extreme scenario?
A: No, as far as the market is concerned, it is going to look at whatever policy initiatives are expected, whether it is in terms of doing something about the fiscal, doing something about the oil price hike or resource allocation. These are things that are going to be pushed further on the backburner.
There has not been much action coming forth on these issues that the market has been crying for. But given the level of political uncertainty that we have seen post yesterday, even whatever little chance there was of some forward movement, has also been put in the backburner. Therefore, the market needs to be concerned about the political developments from a negative view point. Q: What are the possibilities of a global rally of 5-6% next week if Greece does not have a very ugly outcome and the kind of data points that you alluded to from the US lead the US Fed to talk about quantitative easing on June 20? Do you think these are likely outcomes which might trigger any kind of rally if only in the near-term?
A: That is indeed possible because whether it is Europe or US, I think cure for the malaise is likely to be a QE3 or an LTRO3 or some such situation. The moment one starts looking at these options very seriously, I think there could be a risk-on trade and money could come into India.
That is the only positive that can come out of the current situation that is prevailing everywhere, whether it is the international or domestic front. But, that is a possibility because running up to the elections, even the president of the US cannot possibly have a good election outcome if the economy behaves the way it has been behaving over the last few months. He has to do something to give a leg up to the economy and QE3 could be one of the options that is on the table.
Of course in Europe, you need to do something dramatic to ensure that confidence is restored. Yesterday only you saw that Spain's credit rating is just hovering around the junk category. Therefore, I think something needs to be done to revive confidence in Europe and LTRO3 is a possible option. These are options that can probably take the market up by a few percentage points here and there and therefore, that is something that we need to always be watching out for.
_PAGEBREAK_ Q: How long do you think this bearish patch has been extended because of all these developments? The fear, as is pointed out, is that come the end of this year, there is going to be much bigger growth scare coming in from far more influential spaces like the US?
A: As far as India is concerned, most of our problems are domestic because despite whatever has been happening internationally, whether US or Europe, the foreign inflows have not reversed. Probably, we have not seen much inflows post March, but the outflows have been very marginal, if at all.
Therefore, it is not the foreign inflows or the lack of it that has been affecting us, our problems are basically domestic and the solutions are domestic. The solutions are also very well known. What is required is a political will to ensure that these solutions are put in place.
Probably post July, when we have a new President at Rashtrapati Bhavan, that could be the time when new political realignments will make it possible for the government to go ahead in terms of implementing whatever solutions we have in mind. I think that is one window of opportunity that is there post July and that is something that has the potential to take the market up. Q: Sub-8%, the yield ahead of the inflation figure and of course whatever happens next week, how do you do this in terms of an investment strategy then between equities and fixed income or even other asset classes like gold which haven’t performed this year?
A: I think the best bet now is fixed income with a longer duration because that is something which is probably going to give you best returns this year. Equities may not be the greatest of asset classes today, but of course if the confusion becomes worse and sometime during Q3 of this year, if we see some light at the end of the tunnel, whether it is in Europe or whether it is in terms of policy action in India that maybe the best of times for us to start getting into equities.
But of course, there could be monetary easing that could come in US and Europe. That is something one needs to be bothered about. Therefore, it is not as if one should not be investing in equities at all. One should have a reasonable space in equities for investments if the market comes down further. Otherwise, allocations could probably be slightly higher in terms of long-term bond portfolios and somewhat little in equities. Q: For a bit it looked like the defensives were beginning to outperform or give up their valuation premium but stocks like HUL have started hitting new highs again. Do you think that bipolarity will continue as we get deeper into the year and the expensive stocks keep getting more and more expensive?
A: The expensive stocks have become extremely expensive and therefore, there is a limit upto which people will buy into such stocks given the level of uncertainty. But I think, by and large as long as this uncertainty continues, the defensives will continue to at least protect values for us if not generate great returns for us. Q:We have seen a rally in bank stocks. Would you buy public sector banks ahead of the policy or do you think it is a good exit opportunity?
A: I think this rally is a good exit opportunity because public sector banks have been going through bad times. Whether it is in terms of non-performing assets or restructured assets and increase in NPAs in public sector banks last quarter, it has been quite dramatic. I think one would be better off by keeping away from the public sector banks and probably concentrating on selective private sector banks. Q: Infrastructure is usually the last to move in a cycle, would you say that at least in terms of stock prices this could be the period where they are troughing out or you are not still confident about this space?
A: Infrastructure could be troughing because whatever little action the government has the maneuverability to take, without too much of a political ramification, is in terms of ensuring that there is more confidence in infrastructure sector. Whether it is in terms of releasing resources for the infrastructure sector or in terms of tweaking interest rates, all these are possible without a great amount of political consensus.
I think that should be the first measure that the government can possibly take when it has a time to concentrate on these matters. Therefore, it is a good idea to be invested in infrastructure and hope for the best. Q: How do you think the market will deal with the earning season that we are going to head into soon enough because this one wasn't very special either in terms of quality or any real impact on the market?
A: I think the expectations are reasonably low for this current quarter. Therefore, we will have to see how rupee depreciation over the last quarter has helped certain sectors and has affected certain other sectors. There is a lot of black hole in corporate balance sheets in India because of the maneuverability that was given by the government in terms of marking to market currency loans. That is something which will come home to roost sometime.
That is probably what analysts should look at if these loans were mark-to-market, what will be the sort of profits that will be there on the P&L accounts of these companies. All these are going to affect quite a lot of these companies. I think one should be circumspect about this quarter results too. Q: What kind of a working range do you have for the next three months? Do you think we will work with that 4,750-4,800 floor and still not be able to cross maybe 5,200-5,300 meaningfully on the way up?
A: I think one should work with a broad range. As long as there is no catastrophe coming out of Europe and as long as there is no great political turmoil in India, that is the broad range one should be working with.