WF: There are some fears being expressed that the global recovery is somewhat muted and can be at risk if Central Banks around the world start unwinding the stimulus packages. How realistic are these concerns and what could be their implications on our markets?

Navneet: Broadly on the global side, I think we have seen all the policy makers in a very synchronized manner taking bold and decisive moves. As a result of that, we have seen very good recovery in the real economy. And this got reflected in asset markets as well. It seems that a large part of the liquidity created has moved to the asset markets.

As far as the economic recovery is concerned, our view is that the structure of issues - particularly for the western world was the over leveraging of the household and the financial sector. Both continue to deleverage their respective balance sheets. That means that we are not going to go back to an era of non-inflationary continual expansion, and above trend continual expansion, I think we will have an extended period of lower than trend line growth. A powerful impact of deleveraging coupled with the wealth effect, can impact their growth for a long period.

Having said that, given the monetary and the fiscal stimulus that has been given, the possibility of a complete financial Armageddon or a big recession has been averted. But I still think we are going to go through a long period of lower than the trend line growth in some of the developed markets. If I were to pick an alphabet, I would say we are certainly not in the V camp - we think it will probably be a gradual U shaped recovery.

WF: What could be the implication on our market as the result of the fairly tepid growth over an extended period of time in much of developed world? Is there any issue for us to be worried about?

Navneet: So far, our markets have been very strongly coupled with rest of the world. We have been very dependent on foreign capital to finance our growth. Foreign flows can become volatile and that could impact us to the extent we continue to be dependent on foreign capital.

Having said that, our economy is more driven by domestic consumption and domestic investment. We now also have political stability and a real possibility of building our infrastructure this time. I believe we will be able to grow much faster than the rest of the world. Our economy is already decoupled from developed markets.

At some point in time my sense is that sometime in 2010 onwards we will see some decoupling of our markets too from rest of the world - even in terms of market flows. Investors will begin to look at India differently from the rest of the world and rest of risk assets.

WF: The recent resurgence in the dollar is causing nervousness among some market participants as fears of an unwinding of the dollar carry trade are now growing - which can impact asset prices across the world. How real is this concern from the view of our markets?

Navneet: As I mentioned, our markets have been very much coupled with the rest of the world and with other risk assets for the last several years. That trend has not changed off late. We have said recently that the dollar is likely to see a bounce back, and that is what is now happening. Since our markets are still strongly coupled, we can see some near term impact due to this technical bounce back in the dollar.

In the longer run, our view remains that the dollar is likely to depreciate given the monetary expansion that has happened in US. Given the growth prospects of US vis a vis some of the European developed countries, there may be room for the dollar to appreciate against some of these currencies.

WF: Moving to our domestic markets, the Sensex seems to be struggling to go beyond the 17000 - 17500 levels. PE multiples are now north of 20X. Equity mutual funds have seen 4 straight months of net redemptions - retail investors seem to be worried about market levels. Do we need to be cautious about markets at these levels?

Navneet: Markets have doubled this year and PE multiples have also expanded considerably. Markets are now trying to consolidate at these levels. Liquidity has been a big driver .and that will continue to be a big driver going forward.

Markets can consolidate and move to the next level up provided we see earnings upgrades coming through. Till such time, markets may remain in a narrow range. For earnings upgrades to come through, the critical issues are the speed with which execution of infrastructure projects are ramped up. This will need policy level intervention as well as a strong execution focus by companies. Once we see that momentum in execution ramping up, analysts will be able to revise their earnings projections for FY 11 and 12 accordingly.

WF: Some money managers were of the view that the latest set of quarterly earnings that came through were good more because of cost control rather than a robust top line growth. Is that a worry for you as well ?

Navneet: No, because this was expected given the state of the recovery which we are in. It was expected that the revenue growth would be muted and most of the profits have come from cost reduction. Now, a lot of the flab has been removed and companies have got much operating leverage. So, as and when we see revenue growth coming in, the bottom line will be healthier

WF: One issue that some people believe might upset this whole applecart is inflation. With food inflation at above 20%, there is a fear that RBI might resort to some tough measures to rein in liquidity and hike interest rates - which can have negative implications for debt and equity markets. How big and real is this concern?

Navneet: Food inflation has been very high and we have seen the monthly inflation number at 4.5% which is higher than expectation. We are going to see the headline number at around 6.5% in December and probably 8% by February or March.You should expect monetary tightening sometime in the next quarter. But I think the borrowing rates for corporates are unlikely to move up very significantly because the market is pricing in a lot of monetary tightening already. So, whether the actual move by the central bank would push up the overall borrowing rates for the companies - I don't think so.

RBI has already started the whole normalization process of removing the accommodation. Most of the measures in terms of refinancing, forex lines, relaxation in ECB borrowing - all these have already been taken back. The next move would be sucking out liquidity and then followed by the rate hike. It is fair to assume that all of this has already been priced in by the market.

WF: In light of the current market context, how are you guiding your fund management team to position their portfolios?

Navneet: In our equity funds, our focus in 2010 would be more on the stocking picking rather than the large macro calls. There might be sectors which we may not be very positive from the macro point of view, but we are still finding some companies which are attractive from a valuation perspective.

On the fixed income side, in short term funds, because the curve for 1 to 2 years is slightly steep, there are good opportunities in this segment. I think investors can consider long term bond funds perhaps towards the end of next quarter - when rates could peak.