Are the jitters coming back to the global market because today it was lead by the German news? We saw quite a bit of instability and uncertainty in the global markets again?

Arnab Das: I think we are in for rough ride coming from the global forces, from the Germany but that is really the knock on impact. There was an important relief rally after the Fed eased the discount rate last Friday but last night was really not good in the US. Treasury bills dropped quite sharply, they have been quite volatile this morning in the European time zones and the spread between short term credit and short term commercial paper in US and risk free treasury bills have been quite volatile .

So the Fed move put a floor under expectations but it hasn’t restored a full normal operations of the money market and the commercial paper market and there is talk in the market as well that the next move might be either a further cut in the discount rate, bringing it in line with the Fed's fund rate or even a preemptive easing by the fed's of fund's rate. We are not expecting the Fed's fund rate to be cut at this stage but we think that they are watching the markets very carefully. They will react if things start getting out of hand; nevertheless the cycle in the US is clearly turned.

 The consumer is under pressure, starting in the sub prime segment working its way into the international financial system and will gradually work its way into household consumption. We do foresee an important slowdown in the growth rates in US and recession can't be ruled out.

What was going on in today's market? The way we started and the way we closed, what do you think led to that very sharp sell off particularly in the midcaps?

Sushil Kedia: See what happened today in the markets had a genesis with yesterday's large gap up opening. This regime of correction right down from the all time highs of most markets have been coming in with large number of up gap and down gap openings. So the big move in the markets is actually getting eaten up and the short-term traders are actually not getting the hang. So while the Fed did the unanticipated move on Friday and over the weekend there was sense of relief in the markets and the markets really gap upped open here, the local factor of political uncertainty is what made the markets start dwindling right since yesterday.

Though there were various levels in between the up gap of yesterday and where it closed today, some seeming contrarian buy was endeavored into but the extreme amount of advances and declines to advances that we saw yesterday is clearly a refection of at the edge of the seat markets all adding to this picture that market prices have not yet settled. They are jumping and oscillating quite a bit. So while this local uncertainty continued around and as Asia tapered off today, it just added up to the picture that it is no point in trying to get adventurous.

Q: Just a quick word on how much liquidity needs to get sucked out from these markets because that process of deleveraging has started but we are seeing very skittish and volatile moves in the yen-dollar as also in the withdrawals from emerging markets like ours. Do you see this process continuing for a while longer leading to more volatility?

Arnab Das: I think that’s right. I think we are at the tail end of a very long bull run in capital markets around the world, in all kinds of asset prices. We are at the tail end of a very powerful growth cycle in United States, in particular. That growth cycle may have further to play out in the rest of the developed world and also in emerging markets. We think emerging markets are going to be fundamentally relatively well-insulated from the US slowdown this time because so many of them have such large foreign exchange reserves.

But nevertheless, the re-pricing of risk in the capital markets starting in the US is bound to work its way through the international system, in as much there might be local factors, political uncertainty in India or positive factors here and there.

I think there is going to be a lot of forces at work that encourage a rise in volatility. We have been not only at unprecedented highs in terms of asset prices and unprecedented lows in terms of the risk premia. We had also been at very low levels of volatility across asset markets. With liquidity withdrawn, being withdrawn, with risk appetite falling, with a turn in the cycle, that volatility parameter is likely to keep rising, until the US cycle turns in full and the Fed begins to ease. We expect that to start – that process of actual easing in policy to begin in the US in September.

Q: How much of a factor is this for global investors, you think. Do you think it is making lot of people skittish on India on the margin, this political uncertainty that has cropped up or do you think we are largely moving in sync with the global uncertainties?

Arnab Das: I think it’s definitely a factor. There is always an interplay between global forces and local factors, between top down and bottom up, whether it is at the level of a stock or index or country or market. So I think it is definitely a factor and it is a negative that comes at a time when global jitters of the cycle is turning and volatility is rising. So the combination of the two goes a long way in explaining the local underperformance particularly at this time. In the rest of the world things haven’t done so badly, like today some of the high yielding currencies in the world were doing fairly well, some of the higher beta markets were okay. There is a lot of mixed signals taking place, so when you have a local shock like the threat of an untimely election, that’s obviously going to make things worse in that particular market, particularly in the context of this global uncertainty.