As the markets made a modest recovery today from the steep fall triggered by US Federal Reserve Chairman Bernanke bouncer yesterday, the question is how long this shock would last before the market makes a sustainable recovery.

This is because other than the impact of any FII withdrawal, the continued weakening of the Indian rupee, the yet-to-be-visible impact in a significant way of Government’s decisions to revive the economy like FDI in retail and the stubbornly high inflation that has eroded the purchasing power of the people have led to people being sceptical about their stock investment witnessing any meaningful appreciation in the near term.

An indication of how scared the investors are could be judged from the fact that 201 stocks hit fresh 52-week lows on the NSE today of which 14 were bank stocks, 12 of them PSUs.

Normally, the banking sector mirrors the economic condition and that so many bank stocks touched new yearly lows reflects the investor pessimism about any quick recovery.

Dinesh Thakkar, Chairman & Managing Director, Angel Broking, Mumbai, says that markets should take heart from the fact that US economy is on the mend. Excerpts from the interview.

Was the market fall yesterday a panic reaction or warranted?

It was clearly a panic reaction, triggered by global risk-off sentiment after the Fed policy (announcement). Such bouts of sell-offs have occurred in recent times, on concerns as to how policy-makers will be able to steer the global economy in these challenging times. But policy-makers in the major economies have managed monetary and fiscal policies in an orderly fashion.

In the US, growth is improving, unemployment coming down and hence there is no urgent need for Bernanke to disrupt the economy with any drastic measures. He has assured that reduction in QE will be very, very gradual and his statements are credible. Hence, I believe that very soon markets are likely to bounce back.

Will easy money continue to be a market driver?

Yes. India’s large current account deficit exposes us to the need for global capital inflows to finance us. The government needs to undertake structural reforms to revive export, liberalise FDI like they have been talking about and basically improve the GDP growth rate as that is the surest way to improve our currency’s strength.

How long the markets should remain prisoners to FII inflows and interest rate cut by RBI?

In the past three years, the Government pursued improper economic policies that stoked food and wage inflation and reduced supply of key mineral resources. However, the Government realised that it has to mend its ways and focus on restoring economic balance because of which inflation has been reined in. This positive development has not been factored in by the markets because of the ongoing global sell-off.

There is little evidence of inflation easing and more money being available in the hands of the people. Should not Government cut the income-tax rates rather waiting for DTC to be finalised?

In my view, WPI has already eased dramatically. Only reason CPI is still high is because of almost 50 per cent weightage of food in it. But, with good monsoon, high foodgrain stocks and the Government’s intention to not stoke rural wage inflation and MSP prices unduly going forward, food prices will start coming down and even CPI will ease. Regarding taxes, I think the Government will have to balance the objectives of fiscal deficit as well and compared to most developed economies, tax revenues in India as percentage of GDP are not out of line.

Do you think that the market has reached the bottom. If so, which stocks/sectors are worth looking at seriously?

I do think that the recent sell-off has made equities quite cheap. One can look at investing in a mix of quality stocks from defensive and cyclical sectors like pharma, IT, private banks, etc.

If the US Federal Reserve stops its intervention and FIIs start pulling money out of India, what would be the likely scenario?

As I had pointed out, I do not expect the Fed’s withdrawal to be disruptive apart from short-term sentimental corrections. In the longer run, that the US economy is recovering is a big positive for all emerging markets, including India.

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