Market may be in for a surprise rally: N Jayakumar

However, investors breathed a sigh of relief, lifting the rupee and pushing stocks into positive territory after they had lost nearly 2% earlier in the day. 

The rupee opened higher on Tuesday as global risk sentiment improved, while the postponement of GAAR by a year and an active RBI has also helped bolster the rupee's sentiment.

According to Jayakumar, the GAAR clarification and crude oil prices cooling off will support markets in the near-term. He foresees a sharp correction in crude oil prices.

The vagueness of the original plan, which was unveiled as part of India's budget for the fiscal year beginning in April, caused uncertainty among foreign investors, putting an already weak government on the defensive.

Removing some of that uncertainty, Pranab Mukherjee yesterday said that the burden of proving tax evasion would lie with the authorities rather than with overseas investors.

Jayakumar says the government’s deferral of the GAAR is a significant positive. "I think we have a good set-up right now for a surprise rally in markets," he told CNBC-TV18.

However, he remains bearish on commodity market at current levels.

Also read: Nifty may hold 4950-5000 in near-term, says Udayan  

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

Q: More than the Nifty, which is grinding around 5,000, the damage in individual stocks over the last three-four weeks would have hurt a lot of traders and investors. How are you approaching the broader market now, outside the Nifty?

A: At the moment, the participation levels are at such abysmally low levels, you never had a situation like this in recent times. Figures are bearing me out, literally on a week-on-week basis, we hear that open interest levels in Nifty and other stock futures are at five-year and seven-year lows. That clearly tells you that lack of any conviction has been the theme and the sort of guiding principle over the last several months. We talked about it last time as well. If there is a positive, without necessarily having to use one zone logic or brains, it is that the consensus is stay away, we are not sure of this, we are not sure of that.

I think a few things have happened over the last couple of weeks, which make for very interesting reading. We have been bemoaning the fact that the government has been suffering this decision paralysis. We may be uncharitable and keep sort of badgering this. But if you look at it, I think they are attempting to do a few things. The rollback of something like GAAR, which almost had become an ego point at one point in time over the last few weeks, to my mind, is a pretty significant step. When I say rollback, I am saying in some sense a modification and who knows in what form it will be introduced a year from today.

Crude has come off almost 10-12% from the highs in recent times and looks to be heading significantly lower. The rupee is being, to an extent, aided by Reserve Bank of India (RBI), which is substantially more proactive now. If you look over the last three-four months, rupee may have weakened 3-4%, but crude has cooled off almost 10-12%. So, I think there are a few takeaways. If you assume that the government will be in a sense bolstered by taking a few more decisions, the presidential race is sort of decided the next couple of weeks and we are through with that, we may be in a situation where some news may become good news rather than no news is bad news kind of thing. So, all is not lost.

I think the index has come down, much to the chartists’ delight, to test all key supports. It has even broken the 200-day moving average (DMA). To my mind, there will be a false breakdown and the market may continue its grinding. But the big takeaway is that the big buyers in the market today continue to be promoters and insiders.

I have been saying this now for the last six months that the biggest buyers in midcap stocks are no one, but promoters and insiders with full disclosures and a whole bunch of companies where they are increasing their holding because rules of the game have changed. Midcap companies are not getting funding very easily and listing is becoming a bit of an issue now where the currency, which is listed, is not allowing them to raise capital freely.

So, whether it is FCCB redemptions, MNC is buying out, local company promoters increasing their stakes, and complete apathy by domestic investors, I think the scenario is absolutely picture perfect for a good strong rally to emerge, catching everybody off-guard, much the same way it happened between 4,600 and 5,600 in the first month of the year.