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Jyotivardhan Jaipuria, Head of Research, DSP Merril Lynch, said we are seeing a relief rally in India and across the world. "The first round of bad news is over. The consensus had turned negative. A contrarian view has caused this rally. The markets can gain another 4-5% from current levels in the near-term. However, there is more likelihood that the market will go back to lows rather than earlier highs."

According to Jaipuria, CDS spreads are not as bad as last month. "We see some recovery in the credit market. There is some panic buying due to rally, but longer-term outlook not positive."

Excerpts from CNBC-TV18’s exclusive interview with Jyotivardhan Jaipuria:

Q: We went to sub-15,000 levels and have come back to 17,000. How are you characterising this move and how much would you give it on the upside from here?

A: This has been like a relief rally. There has been a relief rally not just in India but across the world because people were very worried about the credit crises. Now, they think the last of credit crises behind us. It’s not that more bad news won’t come. Second, markets everywhere had quite a sharp fall from the top so to that extent technically we had got things which are oversold.

Third, most people were very bullish at the beginning of the year, but the consensus turned negative over the last few weeks. To that extent, the contrarian indicators were that there were enough people who were negative. To that extent, we have seen a relief rally and we will get markets going back testing old lows over the course of the next three-four months.

Q: How much would you give in terms of an upside? We are at 17,000, do you think there is significant headroom left in this pullback then?

A: Rallies happen and my guess is that there maybe another 4-5% on the upside.

Q: What about global risk appetite? Are you seeing any resumption or any improvement there? We haven’t seen any great FII flows yet but can we expect to get some liquidity support in this upmove?

A: If we take something like the Credit Default Swap, or CDS, spreads as an example, things are not as bad as there were a couple of months back. To that extent, one can say credit markets are building in some sort of recovery. People are sitting on cash. They have been negative on the markets and are not deploying the cash. To that extent, what happens is when we suddenly get a relief rally which sustains for sometime, we do get some panic buying coming through. But otherwise the fundamental news in India will be negative. It is not going to be exciting. So, the bigger trend is down rather than up.

Q: What’s you base case over the next couple of months for the market? You go back and re-test the January lows, go lower or form a slightly higher bottom?

A: Go back and re-test the lows.

Q: What’s your take on telecom space after Bharati’s numbers?

A: We have been short-term bullish on this space simply because there have been more concerns in probably a lot of other sectors on interest rates and implementation issue. So, we like telecom just because it is safe; subscriber growth is coming, and near-term at least margins are coming. To that extent, it was good for us that the sector has done well.

Q: What your take about capital goods? You have seen the numbers from BHEL, ABB, and Siemens now. Would you remain overweight here or is this a sector going to cause a bit of pain this year?

A: The sector is over owned. To that extent, it was a consensus by most people who have overweighed it. It’s going to give pain as long as the markets are very edgy. One thing, which could probably help this sector, is if commodity prices starts coming down because that could probably ease some of the raw material concerns. Otherwise, it’s a sector which in the short-term could give you pain till some of these present downturns in the market go away.

Q: What do you expect from the RBI as that is going to be a critical trigger? How do you play banks in the light of those expectations?

A: RBI has taken some move by hiking the CRR already ahead of the policy. RBI prefers to take moves outside of the policy. To that extent, they may or may not do anything in this policy. There is chance that they may hike the repo rate but my guess is they will probably remain flatish, so no real change.

Source: Moneycontrol.com