India's economic slowdown is likely to continue for another one to two quarters: That's the view coming in from AK Prabhakar, head of research at IDBI Capital. In an interview with CNBC-TV18.com, Prabhakar said the government needs to do more to lift the sagging economy and support growth. He expects the Reserve Bank of India to cut interest rates in the October policy.

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Here are the edited excerpts of the interview:

The market sentiment remains weak despite the government's announcements. GDP growth has also slowed further, and the manufacturing is at a multi-year low. What is your reading of the situation?

Prabhakar: The slowdown is a combination of factors along with IL&FS crisis leading to credit flow stopping. The slowdown would last one-two more quarters post which government measures will help the recovery. However, more measures would be required to bring the economy back to higher growth.

How much of the slow down problem is a cyclical issue and how much is downright structural?

Prabhakar: This slowdown is more of a cyclical nature and with a combination of events making it look structural.

What are your views on the large dividend given by RBI to the government and how the government should use it?

Prabhakar: I leave it to the government to decide, but this would help the government in a big way.

Do you see further rate cuts from the RBI after Friday's GDP data?

Prabhakar: I feel RBI may cut rates as it is the need of the hour.

It has been raining losses in the markets, where do you see there is an opportunity to buy?

Prabhakar: There are many stocks which are doing good in this market like private life insurance companies including HDFC Life, SBI Life, and ICICI Prudential Life. Hotel stocks also look very attractive. Indian Hotels, and Mahindra Holiday & Resorts India looks good. Also, defence stocks like BEL, Cochin Shipyard, and L&T can be preferred.

In this uncertain market scenario, should investors play safe and focus on defensives?

Prabhakar: We have limited play in the markets currently and prefer IPCA Labs, DMart, HUL, Trent, and Titan

How you are looking at the big PSU bank recapitalisation as well as mergers?

Prabhakar: The PSU Bank may take at least 2-3 years to give the desired benefit. Prefer SBI and Bank of Baroda, which have already gone through the process of merger. SBI, which is the market leader with 22,008 branches and almost 21 percent of the total banking business can be a rank outperformer among PSU banks.

The slowdown has affected auto sector quite badly. Are you hopeful that festive season will see some bit of an uptick?

Prabhakar: Auto sector slowdown is due to a few structural changes also, light commercial vehicle and heavy commercial vehicle slowdown would continue for some more time. Two-wheeler may rebound faster followed by passenger vehicles. In this space, we like Hero MotoCorp, Bajaj Auto, and Maruti Suzuki, companies with cash and market leadership in their respective segments.

The broader markets have been in a bearish mood for some time now. What's your take on midcap and smallcap stocks.

Prabhakar: If we take mid-caps and small-caps, the markets have been correcting since February 2018 - almost 21 months. After the last 3-4 months of maximum pain, many quality mid-cap has seen very good recovery in the last few months.