IIP may rise; RBI to spread rate-cuts: Rashesh Shah

In his analysis of the economy in the light of the IIP data on CNBC-TV18, Rashesh Shah, chairman and CEO, Edelwiess Capital explained that the IIP had reached a bottom and expects it post a reasonable rise.

He also said that the slowdown in the economy still gtave enough room for the RBI to initiate a rate-cut. He was positive that the RBI would spread its cut in rates across the year. Below is an edited transcript of his interview in CNBC-TV18. Also watch the accompanying videos.
Q: Let's start with the IIP figures which came out for February earlier on today at around 4.1%. What is your perspective on the revised figure of 1.1% for January? What you expect the RBI to move on?
A: The IIP has become fairly volatile during the last few months and is not becoming reliable. We think that the IIP will start to flatten out. A bottom is being created on IIP and we are hoping that maybe from end of this quarter, the index will start seeing a reasonable rise.
But the economy is slowing down and that effect of that will continue, but the rise in IIP has started. Fortunately, the optimism is not so high as to expect the RBI not to cut rates. The economy is starting to bottom out, but still there is enough incentive for RBI to cut rates, reduce cost of capital and improve liquidity. Q: Are you expecting a rate cut now and how many more cuts do you think will follow?
A: The RBI has stated that it will follow inflation and during the last three months, inflation has been trending down. If you see the entire inflation trend, it has come down from a peak of 9.6 to 7 or so.
I believe that there is a high probability that RBI will cut rates in April because it has added that it will start to factor in growth in the planning for a rate-cut due to the effect of growth on the interest rates.
The fears of oil prices are also starting to subside and global investors forecast oil prices trending down. The Chinese economy is slowing down, so lot of commodity prices including oil prices, are coming down.
So, with falling inflation and assuming agriculture production and the monsoon is okay we should expect to see the cuts. But the cuts won't be rapid bit slow and gradual spread throughout the year. Also read: Friday the 13: Will inflation, Infosys nos move market tom?
_PAGEBREAK_ Q: What do you make of the market sentiment with regards to FIIs?
A: The current government action is not helping create an environment of stability and certainty. Eventually, investors will come to the market if they see growth.
Global liquidity has started trending down, the risk-off has started a little bit and a lot of other emerging markets are also not doing well.
Larger factors such as the flows into ETS or emerging markets not dependent on GAAR or government action continued to keep the market afloat in the first quarter, but liquidity is starting to ebb.
In this quarter, there might not be a surge in liquidity in emerging markets. Coupled with this is the feeling of uncertainty and instability which is also not helping people catalyze their actions of investing in the market.
What holds promise is the view on oil prices as a lot foreign investors have begun opine that India’s growth is linked to oil prices. So if oil starts correcting there might be some renewed optimism around India.
Expectations from the quarterly earnings results are not very high and if the oil price starts to come down another USD 4-5 in the next four-to-five weeks, by the end of this quarter we will start seeing FII interest to come around again. Q: If you had to put all of that into perspective, how do you think the markets will move in the next three-to-six months? Do you think the market has put a base at this 5,200 level on the Nifty?
A: In this quarter, market volume has started to be fairly thin. Liquidity has thinned out as usual every year in the first quarter of April-May-June.
The thin volumes have the ability to swing the market by 5%-10% easily along with global shock or sentiments on GAAR.
Investors should be prepared for 5%-7% swing in this quarter on expectations on an interest rate cut, satisfactory quarter results and correction in oil prices.
Until then, a 5-7% risk will always remain, but it will be on a very thinly traded base. FIIs or Indian institutional investors are not exit in a hurry. There is a little bit of selling but I don’t think people are buying in a hurry. So on thin volumes, you will see high volatility. Q: In light of all this volatility expected in the equity markets, what are the alternate investments you recommend?
A: We still believe it is a great time to invest in equity. Savvy investors still have faith in India inspite of GAAR and the government inaction.
People are waiting for the quarterly results and there are quite a few stocks that have corrected a lot. If at all there is any buying in this quarter, it will be fundamental stock purchases.
I don’t think investors are making any call on the market as a whole. As I said, the market will trend sideways with high volatility which is never good for investors in any case. this quarter is going to be good for picking stocks.
We are not very optimistic on gold because India's consumption of gold is going down as a result of which gold prices may correct as China is also slowing down. The US is doing well. I think the incentive to invest in gold is going down and real estate in India is very uncertain. Fundamentally, strong equity is still turning out to be a good investment opportunity.