Why is Standard Chartered neutral on Indian equities?

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It's been a huge rally for the Indian market coupled with very strong inflows as well. Manpreet Gill, senior investment strategist of Standard Chartered is neutral on Indian equities.

He believes India may not be an outperformer in the region because of valuations. "Valuations have come off. But the fact is that when you start looking regionally, there are other markets like China which are even more attractively valued," he adds.

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Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Whats your call on the near-term direction? What's been happening with flows?

A: The macro environment has been improving. Some of the risk, that were priced into the market earlier in the year, are clearly been priced out. The ECB's lending programme has clearly acted as a good trigger. So, it's definitely possible that this does continue for some more time, with a couple of shallow corrections along the way.

We are maintaining a reasonably cautious tone. The reason for that is that while it makes sense to participate in the rally in a reasonably conservative way, the fact is that a number of risks have not fully gone out with this system. What's happening in Greece still looms over all of us.

Q: What do you mean when you say cautious? Do you think the market will correct sharply and you will get into a risk off phase soon, sometime in the next two-three months?

A: If we do see a correction, as long as we don't have a large risk event such as a disorderly Greece default, we should not see a very large scale correction. The reason we are cautious is that the risk of that happening has not gone away. It's reduced. We have gone through some of the risk events, but there is still enough out there that can catch us by surprise.

If we are going to participate in equities, we still prefer the higher quality blue-chip names. We prefer names that are still paying solid dividends. In fixed income space, we are strongly overweight high yield bonds. But within that space, we will obviously look at the names that have more conservative and solid balance sheets that can see through any trouble rather than trying to allocate as much beta as possible. That we think may not be the right decision, atleast at this time.

Q: On India, what's the call in terms of whether or not you see more headroom or you are seller at this level?

A: Within a regional equity allocation, we are neutral on Indian equities. There are reasons to be reasonably constructive. Fact is that if we have global QE, we see more flows into the emerging markets. India should benefit from those.

In terms of domestic policy, I have always been making the point that a reduction in inflation is an important trigger. The reason is simple that it opens up some room for policy makers to ease policy even if it is only incrementally on the margin.

But having said that, the reason we believe India may not be an outperformer in the region is because of valuations. Valuations have come off. But the fact is that when you start looking regionally, there are other markets like China which are even more attractively valued. So, we believe they have potential to outperform.