Vibhav Kapoor of IL&FS said despite the Fed injecting liquidity, not much of that liquidity seems to have flown into India. "That is definitely a matter of concern because even at lower levels, we don’t see a huge amount of FII buying happening."

In the short-term, Kapoor said, the markets could probably trade rangebound with a slightly negative bias. "If things become worse fundamentally and economically, then you could see a further fall."

A: We have had a pretty good rally over the past 6-7 weeks. The market went up by more than 20%, that was helped along by the fact that it was an over sold market after the fall from January to mid-March, and corporate results turned out to be slightly better than what the market seemed to be expecting before the start of the earnings season. Both these reasons and also stability in the global markets actually pulled up this rally above 17,000 levels. Valuations again in certain sectors and stocks began to look a bit stretched.

One gets the impression that in the last 3-4 days when the market was going up, some stocks were again going up in an indiscriminate sort of a way. Given the overall environment that is something difficult to sustain for the market. There are 2-3 headwinds there, oil prices is the major one. The latest report that came in from Goldman Sachs which talks of USD 150-200 per barrel price by the end of this year is the other. Even if that were not to happen, the market is gradually beginning to focus on the fact that this is going to cause serious problems for fiscal deficit, and rupee.

The major reason for the rupee going down is the fact that oil prices are going up, combined with the fact that valuations no longer look so cheap. This part of the rally is definitely over, so we are in a correction to that rally. Either the market would probably stay rangebound for the rest of this month or you could see some downside from here. But going forward, what happens to the global markets, rupee, and oil and commodity prices are going to be the decisive factor.

A: If oil prices keep on at these levels or go further, then you are going to have a problem on the fiscal side, which could put a question mark on interest rates. This means that interest rates could go further at some point in time.

We are already seeing the rupee depreciating. There has been a significant technical breakdown in the rupee-dollar rate. So, the rupee could go to Rs 42 or Rs 42.50, which means that software and other export-led sectors are going to gain from that.

We are already seeing that happening in terms of stock performance in these sectors as far as energy is concerned. Obviously, the oil marketing companies would suffer more because I don’t think the government has the political will to increase prices.

ONGC is a stock which doesn’t stand to either gain or lose much because whatever it gains is taken away by way of increased subsidy. So, the only companies which could gain could be Cairn India and Reliance to some extent because as oil prices go up refining margins go up.

Q: While there seems to be general consensus that the market’s upside will be capped this month, do you think there is a threat if we can break down considerably?

A: The global and developed markets of Europe and the US have been showing a lot of resilience in the past few weeks. That has partly caused the emerging markets to rally. India has also rallied partly on that basis. But what is really happening is that in the developed markets, there is a lot of liquidity which has been injected by the US central bank in the past few months. That is probably beginning to have an impact.

But surprisingly, very little of that liquidity seems to be flowing into the Indian markets. If you look at the FII for the whole month of April, when the market went up so much, it was just marginally positive. In May, it is marginally negative. So not much of that liquidity seems to have flown here and that is definitely a matter of concern. Even at lower levels, we don’t see a huge amount of FII buying happening.

On the medium term, the whole amount of liquidity in the global markets could lead to higher inflation. The inflation threat is becoming more and more severe with commodity prices and as oil prices go up. That could really cause a serious threat to the Indian markets in the medium term. In the short-term its quite possible, as long as the developed markets continue to remain strong, you could see a rangebound type of moment here which could last maybe 2-3 weeks. If the situation doesn’t improve in terms of oil and commodity prices and the global markets try to beak out, you could see a further downtrend here.

While the corporate performance for this quarter was relatively good, you may not continue to see that in the first quarter of 2008 and 2009. The results that come out in July might be significantly worse than what we have seen. If that happens then you could see a serious fall in the market.

So, in the short-term markets will probably be rangebound with a slightly negative bias. If things become worse fundamentally and economically, you could see a further fall.

Q: Is there still some juice left in technology stocks?

A: A lot of it has been built in. But there is a certain sort of underlying change in the trend for IT stocks. That is because of 2-3 reasons. One is the extension of tax breaks till FY10. Secondly, the earnings for the last quarter were better than what the market expected and guidances were reasonably good. The third factor is the depreciation in the rupee.

I think you are in for some further depreciation in the rupee for the next few quarters at least. That trend has reversed. So, you could see the rupee going down to maybe 42 or 42.50. It is going to be a direct relationship between that and oil prices. The more oil prices go up, the more is the rupee going to depreciate. There is some sort of stability returning to the global banking sector, which is also a positive for Indian software companies.

So, all in all there is an underlying change in trend. While in the short-term a lot of that has already been discounted, in the medium-term you could see some more upside in this sector.

Q: What about Bharti that’s been struggling ever since the MTN news has been out in the market? Will it be a rangebound stock at best or do you think the market is still quite nervous about what might happen in terms of the size of this acquisition?

A: A lot is going to depend on what happens to that acquisition and at what price there is a price bidding war. If Bharti can successfully get that acquisition roughly at this price and can formulate a reasonable financing structure for the acquisition, then you will see the stock moving up as soon as that is finalized.

The real fear that the market is having, at least at this point of time, is will it get into a bidding war? Will it therefore have to end up paying much more than they are saying right now? A lot is going to depend on the developments which take place over the next few days or weeks. But my sense is that if Bharti is able to acquire or succeed in this acquisition round about the current valuations of the company, then you could see a major upmove in Bharti. But if they get into the bidding war and if it turns out to be more expensive then it could be a different picture altogether.

Q: What is your sense of what the domestic money is up to right now? The foreign flows have been quiet. But we are hearing of extremely high cash levels for many of the domestic fund mangers. Do you think even the domestic money is sitting on the sidelines?

A: I don’t know. A few days ago CNBC-TV18 showed that the cash level with the domestic mutual funds is now only 6%. If that is true then there is not all that much cash to be invested because typically mutual funds would like to keep at least 4-5% of cash in their portfolios at all points of time.

So, you have just a couple of percentage points to be invested which is not all that big a figure. It’s not only FII flows but even domestic mutual fund flows have not been all that great in this whole rally that we have seen.

So, I don’t think there is too much of cash waiting on the sidelines. I don’t think there are too many new mutual fund issues which are on the anvil or where there is a great deal of money coming. The retail market is not willing to invest in mutual fund afresh at this point of time. So, I am a little skeptical; I don’t think that particularly at current levels we are really going to see a whole amount of buying happening from mutual funds either.