'RBI holding rates won't excite mkt; defensives look good'

After consolidating for series of trading sessions now, the Nifty may suddenly light up because of interest rate expectations from the Reserve Bank of India , Udayan Mukherjee, CNBC-TV18 said. The start of the year has been fairly underwhelming, foreign fund inflows have been quite tepid and there is no breadth in the market since the start of 2014, which is worrisome, he said. Speaking about the macros, he said that one should not read too much into the December CPI data.

Also Read: Earnings growth key for EMs; bullish on IT: JPMorgan

Below is the edited transcript of Udayan Mukherjee's market analysis on CNBC-TV18

On Nifty

The flows have been quite tepid. What worries me the most is the fact that there is no breadth since the start of 2014. You have had a handful of stocks from the IT space, from the oil and gas space which have kept the market in one place and we did see some short covering in the banking space on Monday. The midcap index, the small cap index and midcap stocks like  Exide have done poorly in calendar 2014 so far.

The quality of the screen has been a bit disappointing this year and so, Nifty is still very much in 6150-6350 range and you wish to stretch it out to 6100-6400. So yesterday's rally not withstanding, the market has still not made up its mind whether it wants to go below 6100 or above 6350-6400 in the near-term.

On RBI move

I don't think holding interest rates at elevated levels will excite the equity market. Maybe yesterday's reaction was more to do with the fact that market got compressed in a very narrow range and a lot of short positions built up in the financial space and there was a bit of a release, some of the shorts covered up and you saw banks lead some kind of a pullback in the market that might well extend.

However, if the RBI were to go on pause again in the next meeting, I don't think equity markets should take away from the fact that that's off to the races kind of a situation for stocks. Therefore, a pause is better than interest rate hikes but the key question is whether we are at the cusp of a massive U turn in the interest rate cycle? The evidence does not suggest that – everybody might have different opinions on that but to say in the next few months interest rates will come down 125-150 bps, I don't think we are there yet with the kind of inflation numbers we have.

The RBI governor will be more overwrought about how weak growth has been and if interest rate pause continues, they will be more with an eye on how weak growth is rather than any major comfort that he takes away from the inflation number. So yesterday there was relief but I don't know whether that is stuff which sparks off a durable rally in the stock market.

On stocks

For a market that is trying to breakout on the way up, usually you will find some sectors that have not participated doing quite well like cyclicals. But if you look at it from the start of this year, this is just two weeks data so one should not over analyse it, but Larsen and Toubro ( L&T ), banks are not raring to go at the start of 2014. It has almost been a fall back to defensives like TCS , Infosys ,  Dr Reddys Laboratories have done very well at the start.

You can throw in oil out there because oil has been an entrant to the list of outperformers,  Reliance Industries and Oil and Natural Gas Corporation ( ONGC ) because of the gas price hike that kicks in April but it is still very much a defensive cluster of stocks which is leading the market. It tells you that people are not really playing for a massive investment cycle or a cyclical upturn or a massive growth uptick in India just yet. They want to be here because they don't want to abandon emerging markets at the start of 2014 but the confidence in recovery that everybody is talking about is not manifesting the stock price performance.

It is not only that IT, pharma sectors are doing well, it is also that midcaps have not performed and whenever confidence returns in the growth up cycle, you will find that midcaps are beginning to do quite well because valuations are still far more compressed and high quality midcaps will inevitably join a massive growth party whenever that starts but that is not visible at least in the beginning of this year.

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