See Sensex at 23000 in 12-18 months: Ambit Cap

"My sense is that if the government continues to deliver a reform over the next six weeks, this market could do very well between now and Diwali. We have seen some of the strongest levels of FII interest towards India for the last couple of years," he told CNBC-TV18 in an interview.

In fact, all out positive Mukherjea is seeing early signs of a pick in the economy . He says the corporate and FII confidence is in a "recovery mode". "There is no scope for profligacy in FY14 on ratings downgrade fear," he said adding, "see fiscal deficit at 6% of the GDP in FY13".

Below is the edited transcript of Mukherjea’s interview with CNBC-TV18.

Q: What's the mood looking like right now? Still upbeat after the big run up that we have seen or slightly cautious?

A: Institutional investor sentiment is very positive. FII interest that India is growing based on the incoming interest we are seeing from FIIs particularly, from the States, my sense is that if the government continues to deliver a reform over the next six weeks, then this market could do very well between now and Diwali. These are some of the strongest levels of FII interest we have seen in India for the last couple of years.

Q: You began by saying that this rally definitely has legs. How much would you give it more because we have run hard, we have already run from 5,200 to 5,700? How much more, a similar 500 or may be half of that still there?

A: From January through to earlier this week our target on the Sensex was between 18,000 and 1,9000. Based on discussions with our sources in Delhi last week, we raised our Sensex target to 23,000 earlier this week. So 23,000 over a 12-18 month horizon looks like the base case scenario at this stage.

It is contingent on the government maintaining certain pace of reforms between now and the winter session. My sense is between now and the winter session we probably have around 1000 points extra that could get added to the Sensex. So, from 18,800 we’ll probably go to something like 20,800 on the Sensex. 

Post the US presidential elections and because of the usual antiques which happen in our parliament, there could well be a bit of a cooling off in December. But, a 1,000 points on the Sensex, say roughly 5 percent odd between now and Diwali doesn’t look particularly demanding given the reform tempo and the investor appetite we are seeing.

Q: From the people that you speak to are people talking about any tangible signs of economic recovery or is it just a relief rally because of a 3 year dry spell that we have got from the government with respect to reforms?

A: That is the big question on every investors mind - will the economy turn and how quickly will it turn? I have to say that there are early signs that the economy is improving. The SME credit availability seems to be improving, the banks tend to be becoming more willing to lend. Just 48 hours ago we had those USD 7 billion worth of loans to Tata Steel, the USD 2 billion to Hindalco.

These are the biggest bank loans in a good couple of years. Banks are getting more willing to lend, corporate India has a bit of cash. Corporate confidence is recovering. Also FII confidence in the country is recovering. Its early days yet, we haven’t yet had any new big projects announced. I suspect it will be at least a couple of months before new big projects are announced, but the early signs are encouraging.

Q: Would there not be some kind of a setback as we get into the budget period in March? First of all we will realize the ugly truth of this years fiscal deficit, the actual numbers will be known in February and from all accounts there could be a pro-poor or populist budget as well. So some set backs over there you wouldn’t expect?

A: The 2013 budget is a challenge. We are hearing words from Delhi that the deficit could be held south of 5.5percent. We find it quite hard to understand how the deficit can be held at a figure south of 5.5percent. We are eager to see what the Kelkar Committee report has to say, but if the government does indeed credibly come up with a sub 5.5 percent number the market will react positively, as I said I am not banking on it.