The market focus has shifted to the levy of transaction tax instead of the budgetary proposals. What will be the impact of these measures and the issue of transaction tax on the market?
This is a brave Budget given the cumpulsions of coalition politics. The Budget assumes a bold growth rate. Only time will tell whether this is realistic or an aggressive assumption. Yet, there, certainly, are a lot of positives such as a hike in FDI limit. But the reduction in STCG to 10 per cent is the biggest positive. This implies that tax consideration will not be a major constraint on investment decisions.

However, the transaction tax is an immediate overbearing concern for the market. Considering that every country welcomes capital flows, this tax should be on the ‘sell’ side than on the ‘buy’ side. Also, why should you charge capital allocation? This kind of a tax increases the cost for an investor who also has to bear other charges.

Deepak Chhabria

FIIs have withdrawn more money beginning May than they have invested in the market after having put in close to $4 billion this year. How do you see this impacting the markets and is there any linkage with the market trend?
I don’t think FIIs as a class have behaved any differently from other investors. Collectively, the FII investment is about $30 billion, of which about $10 billion came in the last five quarters alone. So we are talking of a small percentage of money, which is withdrawn if we look out reasonably as a percentage of what came in. So, by and large, the FIIs have bought the longer-term story in India. I would also say that it’s a natural reaction of any market that’s falling.

The macro-economic fundamentals of the country have shown a constant and secular improvement over the past decade and yet markets have not reflected this. Do you think the linkage between markets and economic fundamentals is weak or absent?
Barring the services sector, I think in 1992 was the last time we had such growth. In the period between 1997 to 1999, we had bad monsoons that dragged down the GDP rate, but otherwise we have done well.

The interest rate is a story that’s played out only in the last three years. In the last two years, the world economic growth has not been all that great compared to that of countries such as India, China and certain other Asian countries. In fact, India showed reasonably aggressive growth last year. That, essentially, was the basis of last year’s rally. I would say the market factored in several things. Movement in global commodity prices and lower interest rates in India led to higher corporate growth and GDP growth.

Importantly, the GDP growth was evenly distributed in agriculture, industry and services. So, for the first time, we had a robust all-round growth. We’ll keep getting flows with increasing accountability, transparency and corporate governance.

As far as the last year’s stock market rally is concerned, this is just a personal observation that the market rally from 5,000 to 6,200 happened in a very short span of time. And when it corrected in a short span of time, people were taken aback. So it’s just that when rallies happen quickly, we can have corrections equally fast. We, as a market, are now more global than we were earlier.

An interesting thing is that in spite of a falling market scenario, a lot of equity mutual funds have been coming out with IPOs. How do you view this development? Is it a case of bad timing or is it a case of confidence in the market?
I think everybody is doing it because of the big rally that continued for nine-ten months. We are consolidating on that. And fundamentals warranting a good show, we will definitely see a follow through on this. The fact is economic growth is here to stay at 7-8 per cent. I think it’s a longer-term story that people are trying to sell and are not really concerned about what’s going to happen in specific units.

What are the sectors you will be looking at favourably now?
During the last six months or so, rupee has settled at around Rs 45 to the US dollar. And the pressure that was on the rupee has moved away. So technology is back because various cost pressures have eased and the negative noise that has been there for sometime now is also getting muted.

The second thing is infrastructure spending --that we have seen in the last few years -- will not come to a stop. Cement, as a sector, looks good from a longer-term prospective.

The third is a contrarian view. I view one or two stocks from the FMCG basket favourably. Because I don’t think any sustained domestic economic growth can happen without growth in consumer spending and this will spill over to the FMCG companies. But I don’t think volume growth is a problem. So I would play a select basket of FMCG stocks.

Also, valuations in sectors such as oil, particularly in the refineries and the integrated oil companies, as well as metals, such as aluminum and steel, have come down only because of the fact that everybody has a single or a one-sided view that China is slowing down. But I don’t think that’s going to happen in a matter of weeks.

We have companies like Tisco in India which get into longer-term contracts so that the earnings are not just determined by the spot rate. Plus HPCL and BPCL have shown good results despite these conditions. As I said, the view for the quarter at least is positive. For the other sectors, I wouldn’t mind playing for a long term though.