WPI immaterial for RBI; fear further FII outflow: Dalton

UR Bhat, MD, Dalton Capital Advisors do not expect Reserve Bank of India (RBI) to cut rates in its monetary policy meet today. He believes that although wholesale price index inflation is coming down but the consumer price inflation continues to remain high. Depriciation of the rupee is further tightening RBI's hands in acting on rate cuts.

In an interview to CNBC-TV18, Bhat says the market will not be cheered with a mere 25 bps cut but atleast a 50 bps rate cut.  He also adds that if there is no hope of further rate cut there could be a possibility that the foreign institutional investors who are holders of debt in India might book profits further.

Meanwhile, rate sensitives have seen some buying back, especially in auto space. Bhat is bullish on Tata Motors as compared to Maruti on the back of better offshore numbers.

Below is the verbatim transcript of  UR Bhat's interview on CNBC-TV18

Q: What do you expect from the Reserve Bank of India (RBI) and whichever side they may move, with a rate cut or not, do you expect to see any durable impact on the market from it?

A: Not really. RBI would pause because even last time they had said there is not much room for further monetary easing. After that wholesale price index (WPI) inflation has come down a bit but consumer price index (CPI) inflation continues to be quite high. Since then, the episode of dramatic rupee depreciation has hit the market so therefore, there would be caution.

Also, there has been about USD 3.5-4 billion of outflows from the FIIs in the debt market. Therefore, that is another thing that could worry because if the interest rates come down, there could be further accentuation of that outflow. Therefore, the RBI would be circumspect, hold the rates and pause further cuts and continue to make hawkish statements and that’s the way it should go. Even a 25 basis point which sections of the market expect, even if that were to come through, I don't think the market would be terrible enthused. Unless there is a cut of 50 basis points, I don’t think the market would be enthused.

Q: How do you think the market is positioned for the bigger event that comes through in the middle of this week which is what the Fed decides to do?

A: That again is talk of the impending tapering, something that would engage the market for quite some time now for the next few days. But the Fed also has to feed the markets with some information about the tapering whether it is around the corner or whether it is in 2014-15. The Fed would say that tapering could come some time but they would not give a particular date or a quarter, a particular quarter in which they would start doing. Therefore, that also would be a non-event.

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Q: How is the Nifty positioned? Do you think there is more downside or do you think 5700 is it in this leg of the fall?

A: It could come because one has to wait whether about USD 500 million of FII equity money that has gone off this month is a sort of a contagion from the outflow from FIIs as far as debt market is concerned. If there is a contagion and if it continues in the equity market, then things could be quite bad. Even the USD 3.6-3.8 billion of debt money that has gone out, is a small fraction of what the FIIs hold in Indian debt, less than 10 percent. Therefore, if there is no hope of further rate cuts, there could be a possibility that the FIIs who are holders of debt in India might book profits further.

Q: Amongst the rate sensitives, there is some buying coming back to the auto space. Between something like Tata Motors or Maruti - what would you be more comfortable buying now?

A: Maruti’s numbers have not been terribly impressive. The offshore numbers of Tata Motors have been quite good. Therefore, between these two, at current levels, Tata Motors looks like a better bet.

Q: Are you getting more optimistic about the second half or do you think this kind of global volatility will continue and the Nifty will just keep pinging in this range as it has been this year?

A: I expect the global volatility to continue because things in Europe would keep us engaged especially with election in Germany and further problems you see in peripheral Europe. I think that would be a place to watch and could be a cause for some concern. Within India, there would certainly be some more spending by the government in run up to the elections and therefore, there could be some revival of sentiment within the country. Hence, these two will cancel out each other.

We just have to see which one wins finally. As a matter of fact, it is worthwhile to be cautious because all said and done, the big ponder able is about how FIIs look at Indian debt and Indian equities.

Given the fact, the difference between the performance year-to-date (YTD) of US and Indian market is in excess of 20 percent. Therefore, the people have made money in developed markets and would not be all that enamoured by the emerging markets as you have seen across the board and that tendency could continue. We need to keep a close watch on the market by being somewhat circumspect and on the margin, should budget for a slight fall.

Q: Do you think for the next few months at least 6200 level on the Nifty will remain a roof over the markets head?

A: Yes, it’s a slightly high roof. The market would be somewhere between 5700-6100 range.

Q: The only space that was beginning to see some buying interest was oil and gas because of what happened with crude prices but they seem to be on the rebound. How would you read that development with regards to these oil marketing companies?

A: One good thing is that diesel prices, on a monthly basis, are getting revised with a lull in between sometime. Given the depreciation in the rupee, there is some more room to cover. The policy that they would keep increasing prices is a great positive for the sector but given the international oil prices and the depreciation in the rupee, there is quite some distance before they are able to get somewhere near lower subsidies. Therefore, we need to keep a close watch but the fact that the government has decided that the increases will continue month over month is a great positive.