OMOs, CRR cut better tools for RBI than rate cuts: Emkay

In an interview with CNBC-TV18, Sandeep Singal of Emkay Global Financial Services said, the 350 odd point Nifty rally from 4,750 kind of level is basically technical in nature. According to him, "When shorts get crowded and you don't find incremental seller, you see a pullback and this is a kind of a breather."

Singal also does not wish to give a lot of importance to the S&P report which suggested that India could lose investment grade rating. He said, the market panicked and gave away its gains yesterday, but nothing has changed since April when S&P had lowered India’s credit ratings.
Looking at the macroeconomic situation, Singal believes, "It is far more prudent to adopt Open Market Operations (OMO) and Cash Reserve Ratio (CRR) cut than rate cut in the given tightened liquidity situation. Last time also we were surprised by not only the rate cut but, higher than expected rate cut and RBI surprised market by cutting 50 bps."
Singal further added, "This time there are expectations of 25 bps. But, in our view, if RBI adopts OMO and CRR cut, it would be a far better tool because the liquidity situation is not conducive for banks to pass on this particular rate cut to the borrowers. So, neither at the policy front nor at the transmission front is the rate cut going to help corporate India reduce its cost." Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: How do you read this market movement, is it moving reverse of the economic fundamentals, is it factoring in more action from the Reserve Bank of India (RBI), is that how we should understand today's action?
A: My sense is this 350 odd Nifty point rally from 4,750 kind of a level, without breaking the previous low, is technical in nature. Generally, when shorts get crowded and you don’t find incremental seller, you see a pullback and this is a kind of a breather.
Yes, it was also discounting kind of an optimism build-up in terms of June 18 when RBI meets and they would relax the rate further by maybe 25 bps or so. All these factors are being attributed to this rally but, this might not be a real change in economic situation, only a pullback. Q: What is the short-term impact of S&P's comment yesterday on the sovereign performance of India?
A: It was nothing incremental because they have reiterated the fact that they said in last April. I would say there is nothing new in terms of news. So market panicked and gave away its gain yesterday. But even out of this reiteration, we should check from April till now and nothing has changed.
Whatever factors they were reading and were warning in terms of widening external deficit, on fiscal deficit and rising inflation etc. remain same. That kind of an indication of warning could turn out into reality as well. One needs to be mindful of that while investing in India. Q: How are you preparing for June 18 RBI action? Would 25 bps action be a non-event and the markets will perhaps react for 10 minutes or so and then life will turn to Europe watching?
A: Our stand on the macroeconomic situation has been that it is far more prudent to adopt OMOs and CRR cut than rate cut in the given tightened liquidity situation. Last time also we were surprised by not only the rate cut but, higher than expected rate cut and RBI surprised market by cutting 50 bps.
This time also there are expectations of 25 bps. But, in our view, if RBI adopts OMO and CRR cut, it would be a far better tool because the liquidity situation is not conducive for banks to pass on this particular rate cut to the borrowers. So, neither at the policy front nor at the transmission front is the rate cut going to help corporate India reduce its cost.
That is our stance and that is why we are saying that in spite of this kind of a formal announcement, market should not be rejoicing and one should go and buy industrials. Things remain same at the ground level, in the economy and one should stay invested in defensives. Q: What would you do with your own money, what is the advice to investors? Would you buy current levels, would you wait for the dips, does 4,750 gets taken in your estimates and what will you load on to your truck at these or lower levels?
A: Mostly our stance has been that you should be inclined towards defensive stocks and four sectors are defensive in our view, FMCG, pharmaceuticals, IT. Whether you would go and buy FMCG stocks at this particular valuation or not, we are not more inclined to that. We are lopsided towards IT as a defensive and we maintain buy on Infosys.
In pharmaceuticals, we are preferring Ranbaxy. These are the sectors where you should be a bit overweight or hiding on. Given any state of the market, there are always midcap opportunities which are typical bottom-up things and we are advising our clients to see where there is a free cash flow yield, where there is a higher dividend yield, where there is a good return on equity.
One should invest into those midcap stocks and our recommendations have been Marico, IRB or Divis Lab - these kind of stocks.