Devendra Nevgi, CEO and CIO, Quantum Asset Management, feels the Indian markets have been too dependent on Foreign-Institutional Investor (FII) flows. “I am not surprised that FII outflows are taking the market down.”

“The Indian domestic sector should be encouraged by policymakers to facilitate long-term money or domestic money into the stock market,” Nevgi said, adding that, “Unless that happens, steady and sticky money would not come into Indian stock markets. We are now relying on short-term money and are paying a price with the markets coming down sharply.”

Here is a verbatim transcript of the exclusive interview with Devendra Nevgi on CNBC-TV18. Also watch the accompanying video.

Q: With such a negative sentiment and everything being universally bearish, capitulation has become an everyday phrase. When do you think the dust will finally settle?

A: I am not surprised with the market moves. The Indian markets are strongly influenced by the Foreign-Institutional Investor (FII) flow. When FII flows came in during the last year, especially the short-term flows, we were talking about these flows trying to fund an economic growth in Indian economy, which is a little on the longer end of the side.

So I am not surprised that FII outflows are taking the market down. You have to be an astrologer to understand when the markets will stop falling or when the flows will stop going out or start coming back.

There has been carnage in the global markets and though India’s links in the real economy are not so strong to the global markets but financial links — the short-term flows — have been extremely strong. India’s market beta tends to rise when the markets are falling.

It is very difficult to take a call as to when the selling will stop but on a longer-term basis, the markets have been looking attractive. As a fund, we have very few cash in. If I had more cash, we would have been happy to deploy it in these kinds of times.

Q: The last bear market that we remember, the markets went from more than 6,000 in early 2000 all the way to 2,596 or 2,600 and that was a fall over 50%. It was perhaps a 60-70% fall. Do you see that kind of a fall? Would you see a number way below the 10,000-mark or do you think we must be in the last 10% of the fall?

A: It is difficult to forecast the foreign flows. Unfortunately, the domestic flows in India are not as strong as they have to be. So when there is a global financial tsunami these things will happen. And when a tsunami comes, it doesn’t differentiate between the good and bad stocks. Liquidity becomes important; taking away that capital becomes very important.

The Indian domestic sector should be encouraged by policymakers to facilitate long-term money or domestic money into the stock market. Unless that happens, the steady and sticky money would not come into Indian stock markets. We are now relying on short-term money and are paying a price with the markets coming down sharply and volatility going up even when India is not connected with the global volatility. India never benefited from the house price-rise in the US and so it should not lose because of the fall in the US house prices.

So it’s difficult to say — the market may go either way from here. It depends on where the external liquidity stops going out.