WF: Lets start with the domestic factors first. We are in the midst of the earnings season and we have the credit policy due in a few days - with all the fears of monetary tightening and rate hikes being discussed in recent weeks. How do you see these impacting markets?

Amit: First thing is on the credit policy which is on the 29th.

Monetary policy steps

What the stock markets are really factoring in is 25 to 50 bps of CRR hikes. There are also some expectations of 25 bps hike in the policy rates. But this is not the widely held consensus view. We have to keep in mind that we are coming out of very difficult times, from a zone of extremely low interest rates and a period where RBI cut rates more aggressively than it has ever done before. Reversion to mean is bound to happen from an extreme situation and that is what we are now experiencing. RBI on its part will look closely at the demand situation - it will not want to take actions that can potentially kill demand at a time when it is just picking up.

A CRR hike of 25 bps takes away about Rs. 20,000 crores of liquidity from the system which is currently running a surplus in excess of Rs. 100,000 crores. So, this is unlikely to destabilize markets and has already been factored in. There is a debate on whether RBI will hike policy rates - but we are yet to see robust signs of credit demand pick up. Now RBI can use this as the signal for corporates to go ahead and start borrowing. Because today what is happening is a lot of corporates are borrowing money through the MF route wherein the banks invest with MFs and the corporates come and borrow from MFs. Now, this could bring back corporates to the banking network. Monetary policy steps therefore in my view are already factored into the markets.

Corporate Earnings

Till now, the earnings has been fairly robust and in many cases, have beaten expectations - especially in the auto space, the technology space and capital goods space. Some large companies like L&T and SAIL did disappoint - in terms of top line growth. But, we need to understand that large capital goods companies have lumpy businesses - if you don't complete a certain stage of the project, you cannot book it. So I am not too concerned about these large names because the macro environment for these companies is improving for the better. For example, Larsen could not meet the analyst expectations of the top line because some of their clients could not financially close there projects. Now going ahead, as the credit environment improves, these projects will achieve financial closure and will take off.

Results that have been declared so far are broadly in line or ahead of expectations and that is not a cause for worry in the market.

WF: The other domestic concern is that once the fiscal stimuli start getting withdrawn - like withdrawal of the excise cuts, there could be some pain as most of those excise cuts went into company bottom lines and were not passed on to consumers.

Amit: I think it is true that a lot of this stimulus was retained by the companies which figured in their profits. People are expecting a gradual withdrawal of these benefits - which should enable companies to absorb the impact. As the pricing environment improves, companies may also be able to pass on these cost increases that will come through when the fiscal stimuli begin to be withdrawn.

WF: From an external point of view, China seems to be dominating world news and their efforts to cool down their economy has caused a lot of anxiety across global markets. To what extent are these fears realistic and what could be implications on our markets?

Amit: What I understand is last year the credit targets for the Chinese banks was 1.4 trillion dollars and for this year it is 1.1 trillion dollars. So it is roughly 20% lower but still it is a huge number. Assets prices in China like real estate went through the roof. Commodities also ran up substantially in the last 9 months. The Chinese Government would naturally like to control or cool down the prices of its raw materials - so some cooling off in commodity prices is perhaps only to be expected.

But, at the end of the day, we must understand that the focus of the Chinese Government on infrastructure building is still on. Their large infrastructure projects are still very much on - whether it is the ambitious East - West connection or the airports that are being built - they are all on track and are being implemented.

For Indian markets - from an earnings impact point of view - what's happening in China is unlikely to be of much consequence. Market sentiment and FII flows may get impacted in the short run - due to the Chinese efforts to cool down some asset markets. We are all linked to each other from a fund flow perspective - and can therefore see some impact on the flows front in the near term.

WF: The other big global issue is President Obama's effort to rein in "excessive speculative activity" by large banks. There are concerns that this can impact FII flows and therefore our market levels adversely. How do you see this issue?

Amit: It is perhaps a bit premature for me to comment on this issue but what we understand is that some of the higher risk businesses of the banks - like hedge fund and private equity subsidiaries - may not be permitted. How this is going to be implemented and to what extent, remains to be seen. But sentiment wise, this has the potential to impact negatively and can also impact flows in the near term. This can be a catalyst for a correction in markets across the world including ours. However, this is unlikely to have any impact on our fundamentals.

WF: What is your near term outlook on the Indian market, lets say for the next 3 to 6 months?

Amit: I expect the markets to consolidate, when I say consolidate I don't expect them to either fall beyond 4500 (Nifty) or runaway beyond 5500 (Nifty) in the next 6 months. This corresponds to a band on the Sensex of between 15,000 and 18,000. We are likely to see a good trading band this year - within these ranges. Earnings will support the markets on dips - there continues to be a lot of money waiting to be invested in corrections. There are a lot of investors who missed the rally and will be keen buyers at lower levels. Likewise, the upside can be capped by valuations - we are not exactly cheap at 16x to 17x FY11 numbers.