We have seen tremendous pressure on the rupee over the past couple of months. Where do you see this ending? What are the immediate solutions?

The currency problem perhaps has its roots partially in the high current account deficit and partially in the likelihood of tapering of the QE by the US. India has a good amount of investments from FIIs in equity and fixed income and any redemption, if not balanced by other possible sources like FDI and NRI inflows, is bound to have its impact on the rupee. The sharp depreciation in the rupee has taken everyone by surprise, but the immediate beneficiaries should be India’s exporters and this could also possibly lead to a revival of some sectors like textiles, engineering, auto ancillaries and tourism and who knows, we may suddenly find ourselves competitive in a whole lot of areas we never were before. The immediate thing to do should be to try and tap these opportunities, which may turn out to be India’s strengths in the long term, like we did in IT and pharma. To be very specific, we don’t know where this could end, but we should be ready to counter-balance this and take advantage of the situation wherever we can.

The US Fed tapering fears have gripped our market as well, like other emerging markets. How do you think this will impact our equity market? Do you think the market has already priced in such an eventuality that the market may not fall the way investors fear when it actually begins, say from September?

As things stand, I think the second half of the financial year 2014 could be better than the first half as the effect of good monsoon and election expectations would bolster the rural economy. The market should be taking this into account along with the tapering if it begins sometime in September. Considering that the market has fallen significantly in dollar terms, there is a possibility that we could see it bottom out over the next three months. Part of the tapering expectations has already been factored in, going forward, the main concern of the market participants would be how the government of India and RBI react to the challenges posed by the currency and the efforts to bring growth back on track.

The steps taken by RBI and the government in recent times indicate the return of a higher interest rate environment. Several banks have already hiked home, car and personal loan rates. How do you think this will play out as far as interest rate-sensitive sectors are concerned, and more generally in the equity market?

The interest rate-sensitive sectors will get impacted as a result of the recent hike, but good monsoon should act as a balm and help a bit in reducing the pain. With elections round the corner, the rural economy should do well but not enough to bring growth back into focus. That can only happen if services and manufacturing pick up. The equity market is reacting to both local and global factors and the reaction has been sharp and severe. There is a possibility of the market bottoming out over the next three months, but for any significant rally in equities, the global macros and the local factors have to be favourable, which means the wait could get a little longer.

Stock prices of several key sectors from capital goods, infrastructure, power and telecom have come down significantly from their peak in 2008. Now we are seeing some pressure on banks and cement. What is your outlook for these sectors?

The banking sector seems to have reacted already and could perhaps be factoring in a large part of the perceived problems that are likely to hit the sector. Cement has seen a long and strong rally in the recent years and was perhaps the last sector to start correcting. There is a possibility that the cement stocks may correct a little more from these levels.

It seems only a few sectors such as FMCG, pharma and IT are holding up the index. What is your call on these three, given that they already look expensive?

When the market starts looking vulnerable, investors, especially long-only funds, will have to move towards defensive sectors as most have the mandate to stay invested. In the current scenario, pharma and IT stocks have the tailwind of the currency and FMCG has the power of brands and resilient consumer demand. So it is natural for investors to migrate towards these sectors, but of late valuations vis-à-vis growth are looking expensive in the FMCG space and some of these stocks have corrected sharply.

Monsoon has been good this year. How do you think this will impact certain sectors?

Rural consumption should be good in the second half of the financial year and sectors that cater to this segment of the population should benefit, but high interest rates and a cautious banking sector (hit by rising NPAs) could make things difficult. It would be very difficult to segregate corporate India into those companies that address the rural segment and those that address the urban areas. Overall, the going will be tough in FY14.

Other than the US Fed tapering, what are the global events that Indian investors should watch out for? Some experts say the recovery in the EU may also be critical. Your views?

While the US and Europe are very well researched and watched, the key would be China and other emerging markets, which could pose a risk to global growth. A large amount of investments have been made into the emerging markets over the past few years and a reversal of capital flows can pose a risk to these economies. Most of them are dependent on overseas capital for growth. China seems to have a problem of excessive debt and a slowdown could impact it and the global economy much harder. On the other hand a recovering US, euro zone and even Japan would balance the situation.

In terms of risks to our market, how significant is the forthcoming general elections in 2014? There is a view that the market will be subdued till the elections next year. Your views?

The uncertainty of elections will always be considered seriously by any investor and, yes, there is a possibility of the market staying subdued until the results of the general elections. Markets should favour a strong mandate and a government ready to take policy action to kickstart growth. But this cannot be looked at in isolation. We have global events driving the market much more than local factors today. The continued unrest in West Asia and any worsening of the situation there could lead to a spike in oil price, for example. So elections do matter, but a lot of other factors also are relevant. zz