"There is a lot of interest coming back, especially in the midcap side," believes Dipan Mehta, member, NSE & BSE. Mehta's bullish view comes after about twelve midcaps pulled down the indices drastically in the past two weeks.
Mehta believes the market rally depends on the rupee level. He says any depreciation in the rupee level could damage the market momentum. "If the rupee corrects back to 56-57/USD, then that could be a bit damaging and FII flows reverse as well. So, while we are quite optimistic for the rest of the month and the rest of the year, the biggest risk factor and what we need to look out for is the rupee-dollar rate," adds Mehta.
Mehta also opines that investors are awaiting the RBI policy on March 19 to see if the central bank cuts any interest rates. The RBI policy, according to Mehta, is the key signal to watch out for, for the next few days.
Below is the edited transcript of Mehta's interview to CNBC-TV18.
Q: What is your view on how this first half of the month will pan out considering the crucial RBI policy is coming up? In the last three trading sessions, we have seen a bit of a pull back in the market. Do you think this pull back is durable?
A: What we are seeing is the knee-jerk reaction to the amendment to the income tax act regarding residency. The market seems to have calmed down. I think FIIs as well as the domestic investors are taking advantage of the sell-off and gradually increasing their positions.
It is heartening to note that FII flows also have turned positive again. There is a lot of interest coming back, especially in the midcap side. Market has corrected in the midcap segment so valuations have become little bit more reasonable than what they were earlier in February. That is weighing out. We are getting back to business as usual.
One major event is out of the way and now investors, traders are looking forward to March 19. They are waiting to see exactly what the RBI does and whether they able to decrease interest rates. That could be the key signal to watch out for. That is just what is required for this kind of nascent recovery that we have seen.
Q: What about the Budget session as a whole? Which are the key bills that you would be watching out for in terms of approval or likely approval? How much of a trigger do you think will be possibly for the equity market?
A: Whatever has to come through from New Delhi is over and done with. Whatever bills are tabled, they have been discounted and the positions of all these parties are known and that has already got discounted. Overall, the RBI policy and the global markets moving forward are the two variables which will determine stock prices in March itself.
Then, we can look forward to April and May which would be the earnings season. So, that is the kind of roadmap for the market. Whatever view the parliament takes, I don't think it is going to have a material impact on the direction of the stock prices.
Q: The global markets seem to be the key parameter on which our market is moving, not just today but for the past couple of trading sessions. How high do you think the probability is of the global market trigger surpassing any of the local economy slowdown? If we do see another wave of a risk on in global markets, do you think it will supersede the slowdown that we have seen with respect to the currently account deficit, GDP, etc?
A: That is an interesting point. Global markets and the rally that we are seeing over there is certainly aiding the sentiment. It is impacting FII flows positively and that is kind of masking some of the challenges which we are facing in our economy; the most important one being the current account deficit.
However, the rupee has remained stable and every time we see stability in the rupee, the problems relating to the current account deficit go that much more in the background, not that they will get completely eliminated. If there is going to be a problem on the current account deficit side, then its reflection will come from the rupee. So long as the rupee is trading in that narrow band of 54- 55/USD, investors will believe the damage caused by higher current account deficit has got contained.
Whatever rally we have seen in the last two-three days, for the rally to continue, the rupee has to remain stable. If the rupee corrects back to 56-57/USD, then that could be a bit damaging and FII flows reverse as well. So, while we are quite optimistic for the rest of the month and the rest of the year, the biggest risk factor and what we need to look out for is the rupee-dollar rate.