Mkt upmove depends on banks, infra: NBIE's Advani

If the Reserve Bank of India governor Raghuram Rajan manages to address the twin issues of inflation and rupee fall, then there will be a period of consolidation in the market, followed by a move up, believes Pashupati Advani of NBIE. However, he cautions till banks and infrastructure companies start moving, pulling up the rest of the market will be difficult.

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In the debate between cyclicals and defensives, he says cyclicals will be fine as long as interest rates are low. He gives the example of the US, where interest rates are at one or half a percent and draws parallel to the high interest rates here. This in turn makes it very expensive for companies to borrow money and leads to projects becoming unviable.
He is positive on defensives and select telecom and pharma companies. He also sees small telecom players consolidating going ahead. Below is the verbatim transcript of Pashupati Advani's interview on CNBC-TV18 Q: It has been an interesting time for our market, we hit that all time high and now we are taking a bit of a breather. Do you see the direction upwards again?
A: I think we have still got inflation so in nominal terms the market continues to do well. However from the outside people are saying when is the dollar going to stop and I think our governor is trying to address both these topics. If he does then I think there will be a period of consolidation and then a move-up. If he doesn't, then in nominal terms the market will continue to go up. However until the banks and infrastructure companies move, you cannot really pull up the rest of the market because they have a heavy bias in the indices. Q: At the interesting battle today is not between bulls and bears at certain levels, 6,400 and 6,000, it appears to be between cyclicals and defensives, we see one day of roar in the cyclical stocks especially the day after the polls on Monday, we saw banks and cyclicals on the front foot and then we saw empire strikes back on Tuesday and Wednesday, we see the defensives come back, what would you bet at this point in time, are you sufficiently convinced of the recovery to bet on cyclicals?
A: Cyclicals would be fine if interest rates were lower. So I think we need to see a demonstrated sort of lowering of interest rates and when I say lowering, you look at the US for example, interest rates are at one percent or half percent. So they can afford for cyclicals to come back again. Here the fixed deposit (FD) rate at 8-8.5-9 percent even, it is very expensive for companies to borrow money and therefore a lot of projects become unviable and that is the real issue. I think the governor is trying to attack inflation saying that let us bring it down to 4-5 percent maybe - if he starts doing things to make that happen then cyclicals will roar. Q: Is there a possibility of a correction in the early part of 2014 purely because we have some headwinds and not just tapering, there is supply of paper that will hit the markets, there is possibility of a rate hike as well. Do you think the market could correct in the early part of 2014?
A: Typically this year March will be a tough month and I don't think January will be as exuberant as it was because there are still people sitting on the sidelines. So unless the dollar begins to have some stability in March then the March problem and the FPO problem and the government divestment problem will all come. It is as you said supply of paper but I am more concerned that on the good side we are trying to get India into the bond indices, the Morgan Stanley bond index in which case Indian paper will be absorbed by traditional players, it will be quite a large number and that will probably help things. So those are all small steps, it is a question of which pegs drop. In the middle of it all we may get downgraded, then what happens.