See only one more 25bps cut in 2015; avoid infra: JP Morgan

Moneycontrol Bureau

Brokerage house JP Morgan sees only one more rate cut of 25 basis points by the RBI in 2015.

In its credit policy announced Tuesday, the RBI said CPI inflation was projected at current levels (5.3 percent) in the first quarter of 2015-16, moderating thereafter to around 4 per cent by August, but firming up to reach 5.8 per cent by the end of the year.

“In the post policy press conference, the RBI Governor also reiterated the need to maintain risk free real interest rates at 1.5-2 percent,” said the JP Morgan note to clients.

“Putting these together, our Economists believe there is scope for only one more rate cut of 25 bps in the current calendar year (which would take the policy rate to 7.25 percent; note 5.8 percent + 1.5 percent = 7.3 percent). Inflation would have to surprise meaningfully on the positive side to open up space for more monetary easing,” said the note.

The brokerage is bullish on cement and commercial vehicles and is looking to position its portfolio for a potential domestic recovery. Quality financial services companies with a strong capital and liability franchise and manufacturing sectors with low financial leverage and high operating leverage are its favourites.

“We would avoid chasing beta - particularly in segments like low quality financials and infrastructure conglomerates,” the note says.

“Note that leverage in the economy remains high, the savings rate is still depressed and the growth recovery remains weak. So they are unlikely to be able to grow their way out of trouble. We are also underweight rural discretionary consumption plays,” the note said.

JP Morgan remains overweight on IT services and healthcare, citing solid demand environment.