Excerpts from CNBC-TV18's exclusive interview with N Jayakumar

Q: What’s your feeling is it just a pullback from the rally we had or is the trend broken again?

Jayakumar: The issue really here is that the markets have gotten seriously oversold a rally for one reason or the other was sort of coming through and when people ran out of reasons and said that the bears had got tired of being bearish and therefore a rally had to emerge but for one reason or the other, the rally came through. One of the things noticeable in this rally is that people with the money have still continued to remain on the sidelines. No new money has really walked into the markets, the bears have covered their positions and that’s evidenced by the fact that a lot of the early stage covering was in the form of the Nifty, where the Nifty went into a sharp premium but individual stocks, people kept their short positions.

Over the last week people have been covering their individual short positions which they had borrowed and they are essentially squaring off the Nifty which is why the Nifty premium also has pretty much disappeared. I think this was a rally entirely led by short coverings. It was not based on anything other than the fact that the markets had got really oversold and therefore they needed a pullback.

While all this have been happening is that a lot of the paradigms that we have been talking about whether it is a dollar-rupee, the interest rate scenario etc have actually changed, so while the rally has emerged for all the reasons that we didn’t believe it would happen which means that the market actually went up not because they were bullish but because the bears just wanted to cover. For the moment we may have moved into a higher range from 4,500 to 4,950 range, which we traded earlier for some length of time to maybe a 4,900 to a 5300 -5,400 kind of a range for the moment.

Q: With regards to crude, the equity markets have just shrugged that off completely, now we are up to USD 125/bbl, do you think it is the part of the reason why the global equity markets are getting edgy finally?

Jayakumar: Crude has always been one commodity that somewhere along the line people have felt related to the real world demand-supply situation far more. It was never a function of people speculating the crude purely because the liquidity conditions were easy. Until recently the move at least for the moment the last week we can have, to me indicates that we can be in the final blow out phase of the move on crude. Maybe it can stretch to USD 130/bbl or USD 140/bbl but clearly there is a disconnect between the predictions of very strong slowdown in most parts of the world associated with the rise in the crude prices. Even a flattish crude price performance in the USD 100/bbl to USD 110/bbl range may have given us the confidence that perhaps this not a situation where it is completely disconnected with reality.

My own sense right now is that virtually every trigger whether its some problems in Nigeria or some supply line dislocation etc, is being used as a reason for spiking up crude. I get the feeling that maybe crude is going through the same kind of a phase that gold went through about a month and a half ago where it peaked out at USD 1025/oz and therefore I believe that this maybe some kind of a short covering spike which even though the dollar rallied and it rallied pretty strongly when there was no indication that there were no further interest rate cuts. Despite that while some commodities came off but the bounce back in crude seem to be more that there are long-term shorts that are now covering out and coupled with that are these predictions that are coming from the levels of USD 150/bbl and USD 200/bbl which to me sounds like the final predictions in the fall happens in a sense.

I personally believe that the crude has to adjust to reality and sharp slowdowns in India and China, interest rate conditions not being conducive to growth indicates to me that crude can’t continue at this pace.

Q: Your thoughts on the sharp depreciation on the rupee and what it means for the equity market in your eyes?

Jayakumar: This has been the most baffling move, people have talked with the co-relation of oil but I don’t quite get that because essentially what’s happening here is that although the demand for the dollar in the short run may have gone up but if somebody could explain, especially the RBI as to how and why we still continue to report a net positive accretion to Fex Reserves week on week and the figure last week was about USD 312 billion and through this entire period if the RBI has actually used its Market Stabilisation Scheme (MSS) limits in supporting the dollar by actually buying it at every level then clearly most people seem to believe unless there is something that we are missing that a stronger rupee would actually be an antidote for the inflationary pressures that we have here.

As opposed to that we have actually had 4% depreciation in the rupee in literally 8 days. I believe that the RBI at some level needs to be a market maker in dollar-rupee and actually should be out there selling down the dollars that they have bought all the way down to 39.75 dollar-rupee. Therefore this entire sharp move has had a twin impact; one it has exacerbated the concerns of external deficits and more importantly the current deficit is a serious account issue and countries with current account deficits were targeted for the equity market underperformance. But in addition to that, we have the situation where even from a local inflation perspective, we are trying to fight inflation using every tool and yet the dollar-rupee where the RBI is well positioned armed with dollars is unable to actually keep a stronger rupee.

I think it’s baffling and I am not sure if we have seen the end of it but it is leading to aberration in terms of suddenly the IT sector moving up 15% to 20% purely on the back of a weaker rupee. With these kind of multiple pulls and pressures, the last thing that we actually expected but we have got is a weaker rupee, which probably makes the overseas investors even more nervous because to add to a 5% index downward move, you have another 3% to 4% that you loose on account of the dollar-rupee.

Q: You spoke about 4,900-5,300 range, we are almost at the lower end of the range, you don’t think it’s likely that we go back and retest the lows from where we bounced?

Jaykumar: I think we need to see significant further negative news but on the strength of what we see right now, I think a range of 4,850-4,900 would possibly hold and just like we are tempted unsuccessfully to take out 5,200-5,250-5,300 range, we will probably unsuccessfully try to break on the lower side.

Its true that there are lot of shorts have covered out and its true that there is lot of negative news that have developed but I am of the opinion which is largely based on the fact that some cooling off in commodity prices notably oil  is what I am expecting over the next few weeks.

So taking next 4-6 week perspective there could be an attempt to break 4,850-4,900 but that may act as a reasonable cushion because the way down to 4,500 eliminated the longs, the shorts came out in the move up. I think we are in a bit of a fair equilibrium and we may well be entering a phase where we have absolutely  new variables to look at like the dollar-rupee close to 42, the interest conditions in the Indian economy probably having topped out. We are taking about a scenario where four weeks ago it was very clear that while the US Central Bank was looking at a combination  of lowering interest rates, injecting liquidity and we were looking at exactly opposite which is sucking liquidity out and raising interest rates further. They were more concerned about growth rather than inflation and we were more concerned about inflation than growth  so may be some or all of these factors have played out in a sense.

So I think we are in a bit of an equilibrium and unless new factors emerging not forgetting the fact that lowering of interest rates to the levels of 2% have actually meant internationally that so much liquidity has got pumped into the system that inevitably it had to find its way into various markets, the US equity markets being one of them and other emerging markets in a sense as a second round derivative.

I see very little action, I see people playing between 20-25% of volumes of what they did at peak levels. I see a limited activity and I see 4,900 holding give or take a 1% or so and maybe 5,300 holding on the way up unless certain new macro economic negatives emerge or new conditions worldwide emerge for instance calls for capital that these big financial institutions may need and if that doesn’t come through then recapitalization efforts failing could mean much larger damages to equity. That to my is the only concern that while write downs continue, so far they have been met with recapitalization but if recapitalization were difficult to come by, then we would have a problem but for the moment I think this range will hold.