While on one hand, China surprised the global markets by slashing key rates on Thursday, the rate cut by the European Central Bank (ECB) was in-line with expectations. AK Prabhakar, Senior Vice President (Equity Research), Anand Rathi tells Puneet Wadhwa that any quantitative easing could create inflationary pressure for India. Edited excerpts:


Did the outcome of the European Central Bank's policy decision come as a surprise? Do you think that the Reserve Bank of India (RBI) and other central banks across the globe slash key rates in order to spur growth?

The ECB’s policy action came after the strong policy response from China and England, but the global markets have reacted negatively. In my opinion, the ECB will wait for some time before embarking on another round of long-term refinancing option (LTRO), which has put pressure on the Euro. In the upcoming policy meet on July 31, we expect the RBI to slash the cash reserve ratio (CRR) by 50 basis points (bps).

What could be the likely impact of another round of stimulus on the global markets, including ours?

Any quantitative easing (QE) is negative for India, as it would create inflationary pressures.

The $10 billion debt auction of government securities (G-secs) and corporate debt last week saw muted response from overseas investors. How do you interpret this development? Why do you think the FIIs are shying away from the Indian markets?

The foreign institutional investors (FIIs) have been shying away mainly on concerns of slowing growth, various downgrades by the rating agencies and the currency risk. These factors are playing spoilsport for the FII’s.

There have been reports of the government planning to open the single-brand retail for foreign direct investment and the RBI easing norms for microfinance institutions. How should an investor read into these statements? Do you expect the authorities to back-track again?

Opening up of the retail sector to foreign direct investment (FDI) is a long expected move. The development will be positive for the sector. Stocks like Raymond, Arvind, CESC, Aditya Birla Nuvo will benefit from this move.

On the other hand, the RBI’s proposal of easing norms for the microfinance institutions will not directly benefit any company but it will indirectly boost the economy.

What are your expectations from the upcoming earnings season? How are you approaching the agri-related / FMCG plays given the existing margin pressures, rich valuations and the state of monsoon across the country?

The results will be a mixed bag with some companies reporting a good performance. However, earnings visibility along with the management guidance will be keenly watched.

A delay in monsoons will impact the FMCG and agri-related stocks. The consumption theme will get impacted as the rally in the stocks, especially FMCG counters, has been mainly on realisation increase on not on volume growth. The volumes have been muted and higher input cost has been impacting the operating margins for the companies.

Would you be a buyer in the mid-cap and the commodity related stocks at the current levels? Can you suggest a few good fundamental themes here? What about the auto pack in the light of the recent sales figures?

We would be buyers in the mid-cap stocks like NBCC, Zydus Wellness, Cadila Healthcare, Tata Coffee, LIC Housing, Mahindra Holidays and Resorts and Neyveli Lignite.

As regards the auto pack, a delay in monsoon, high interest rates and slowing demand as reflected from lower sales numbers can act as a drag for the sector in the short-term. We have a cautious view on this space.

Given all this, how should one re-balance their portfolio? What would be your advice to a person who has missed the rally in the first half of 2012?

The rally in the first half of 2012 has been around the 5000 levels and has not done much. More than the market as a whole, it has been a stock specific rally. Stock picking assumes more importance now.

Counters like Castrol India, Cummins India, Rallis India, Coromandel international, IPCA Laboratories, Raymond have given good returns and should be able to deliver good performance going ahead. So, one can rebalance the portfolio with these stocks for better returns.