Business Standard: What do you think about the current rally, and how do you see the market moving in the coming days?
Rajashekar Iyer: The current rally is to be seen in the light of two special events. One, liquidity in the system has increased considerably with domestic savings being on the higher side. The Sensex was quoting at around 10 times lower than the FY 99 multiple, making the valuations extremely attractive. In recent years, the Sensex has traded in a 10-15 forward P/E range. The market was trading at the lower end of the valuation spectrum which has made this rally possible. Though the interest rates are ruling lower, the demand for funds has dipped. Thus, what has happened is that very low valuations have pushed up the stock prices. As in any other case, when too much money chases too little assets, the price of the asset shoots up.
Similarly, what we are currently witnessing is stock price inflation wherein too much money (excess liquidity) is chasing a fewer number of stocks. However, if this process has to continue, there has to be a continuous improvement in valuations. If the valuations fail to improve, the market will remain in the trading zone, and the Sensex will move in the range of 3700-4700.
The lack of liquidity in all but a few of the major stocks would mean that it would probably be useful to view the market as a trading market.
BS: What factors do you see hampering the current rally?
RI: I believe there could be no uptrend in the rally in the current phase because of the problems related to the infrastructure bottlenecks and high fiscal deficit.
The lack of infrastructure facilities does not encourage the corporates to set up business in the country. Also, a high fiscal deficit pushes up the cost for the corporates. Thus, significant reforms are required in the areas of infrastructure, and the government needs to take a closer look at the fiscal deficit. The market will continue to remain constrained till the time there is significant reforms in these areas.
BS: How has been the foreign funds viewing the Indian markets, and how will the FII activity be in this particular year?
RI: The foreign funds are generally positive about India, and the major reason is that there has been no meltdown as was witnessed in other south East Asian countries. The selling witnessed in October and January was temporary, and it was more in order to meet the huge redemption pressure. Some of the foreign funds, which had lesser India exposure, are now increasing their exposure as they perceive India to be a relatively safe market. Thus we see good buying by some new funds.
BS: What are the various steps that corporate India and the capital markets expecting in the forthcoming budget?
RI: Lower import tariff and buyback of shares are the two things which the market is expecting very keenly in the forthcoming budget. This could really give a fillip to the market. The lowering of import tariff would have a positive impact on the market. However, the compulsions of coalition politics will make it difficult for the new government to take these hard measures.
