Nifty may find base at 5250; rate cut needed: Deven Choksey

The market continued to disappoint after the Nifty fell below the psychological 5,400 mark. Market analysts believe that the rupee’s current behaviour and high interest rates may keep it under pressure, says Deven Choksey, MD of KR Choksey Shares and Securities.

He sees portfolios to unwind furthermore if the rupee continued its freefall in the currency market. In fact, the market may also fall below 5,250 levels; the foreign institutional investors (FIIs) may be pulling out of defensive stocks. To keep them intact and see a revival, interest rates need to be cut to build a sentiment that India is growing, he told CNBC-TV18. Also read: Emerging market taper terror 'quite overdone': Mobius Below is the edited transcript of his interview to CNBC-TV18. Q: After losing 750 points in Friday's trade you would hope for some sort of a bounce back. The opposite has happened on Monday. Another 350 points were lost on the Sensex. Is the mood so bad that investors just want to exit? A: The investors are basically foreign institutional investors (FII). On Friday there was one typical characteristic of a reverse arbitrage wherein we ended up selling the cash portfolio and buying the Futures market portfolio. On Monday, a similar possibility in some of the counters is seen. It is where what one is finding that they are generating cash price by selling the cash market portfolio and creating the position in the Futures market. Till the point of time, we see the revival in the rupee behaviour; we are likely to see unwinding of the portfolios continuing. The major amount of pain is going to be there. 5,450 was the crucial level. Technically, if that level plays in many cases in many portfolios the stop losses would trigger and they would end up selling it further, so it could create further pressure. As of now the situation has not changed from what it was Friday. It remains by and large same. Q: FIIs have not yet given up on many of these defensive names, the likes of Tata Consultancy Services (TCS), HCL Tech, even some of the pharma names. Do you get a sense that if things get worsen then FIIs may start to selloff these defensive stocks as well? A: You cannot rule out that possibility. As of now, the pressure is not as much from their side for unwinding the defensive portfolio. But, if the control on the currency is not found then probably even their portfolio would probably come under pressure. As of now, defensive portfolio for most of the FII is still holding and they are getting that money on the table. If the situation not seeing under control or if Nifty comes under pressure, then probably they might unwind the portfolio. I believe that 5450-5250 journey in which that may not happen. Maybe if it cracks below 5250 then probably we may typically see that capitulation state wherein those defensives also may come under pressure and unwinding may take place. Q: What then about the banking space? The fall there has been very vicious. We have been talking about how names like Yes Bank and so many others have fallen 50 percent just in the last three months. If there is a structural de-rating which has taken place in the banking space has it already played out in terms of price correction or do you think that they could fall some more? A: I think you are already close to 9 percent treasury yield at this point of time when the available-for-sale (AFS) portfolios of most of the banks are showing significant amount of mark-to-market (MTM) provisioning. If we continue to hold at 10 percent yield, then probably at the end of this quarter you might see some of the banks showing some distressed performance at the bottom-line due to the MTM provisioning on the portfolio itself. That sounds scary. If you look at the top five banks' AFS book size including State Bank of India (SBI) or for that matter ICICI Bank, Axis Bank, Canara Bank and HDFC Bank we may see MTM loss coming up between 8-60 percent on the bottom-line for many of these banks and that is where the major pain is. That is why people are selling out the banking portfolio. Unfortunately it carries a huge amount of weight on the Nifty and that is why you are seeing the pressure coming and building up on Nifty as well. _PAGEBREAK_ Q: When will this market will stage a pullback? If it does, will it be sharp or will it be extremely shallow in nature? A: For a sharp pullback to happen you still have to synchronise with one important factor according to me and that has been a sharp cut in the interest rate. Currently, the Reserve Bank of India (RBI) has maintained an elevated interest rate policy. It is not going to help. You will have to signal to the world that India is returning back to growth and for that gradual cut in the interest rate will not help. If you bring down the rate of interested by 1-1.5 percent then in that situation you might see the market returning back to some kind of confidence. There would be a sharp pullback coming in. I would think that somewhere around 5250 would be the level at which Nifty might base first, then a pullback of 350-400 point is a possibility provided the rate of interest is reduced, otherwise gradual reduction in interest rate may not help.