RBI must intervene in forex market now: Sanju Verma

Euro zone continues to spook markets across the globe. Sanju Verma, managing director and chief executive officer of Violet Arch Capital Advisors warns that investors need to be cautious for the next three months.

Even though she does not expect Greece and Italy to default and says that EU concerns are already priced in, 'Europe and its geopolitical concerns remains an overhang for the market,' she says.

Verma believes that there is a need for the RBI to intervene in the forex market now.

She expects bond yields to remain firm at 9% in the near-term.

Below is an edited transcript of Sanju Verma's interview with CNBC-TV18. Also watch the accompanying videos.

Q: Are you disappointed to see how the market has turned tail over the last 10 days?

A: I am disappointed but I am not necessarily surprised. If you go back in time a bit, 2009 was the year when everybody was long on China and India and not surprisingly, the Nifty and the Shanghai Composite returned in absolute terms, like 70% plus to investors. It was also the time when you went short on the US dollar. Come 2010, the only trade that really made money for investors was going long on gold, which in absolute terms returned more than 30%. And if you got lucky and had gone long on Swiss Franc as well you would have made an additional 20-25% more. People who coupled that trade with going short on the euro made much more.

In 2011, I think there has been a bit of confusion. People have not got their ear to the ground as to what exactly or which asset class is really going to make meaningful money. Gold continues to hold fort, calendar year to date it has returned more than 25%. And people have gone short on equities as an asset class; be it 500 emerging markets everything has fallen between 15-20% more. So, it is has nothing to do with India in particular.

The risk-off trade has held fort and that is precisely the reason you have seen equities as a an asset class getting butchered and more so India, because despite the fact that valuations have come off from trough to peak, we are trading at something like 12.5 times one year forward if I was to assume and EPS of Rs 1300 for FY13. There is a lot of noise that India is still trading at a 25-30% premium to other emerging market peers.

However, I think a very interesting statistic that has gone unnoticed and which will drive flows and also sentiment and the broader indices, going forward, is the fact that in the month of October about 25-26% of global emerging market funds became overweight on Asia pack and emerging market as a space. In the month of September only 9% of global emerging market fund managers were overweight on Asia pack in emerging markets as an asset class, hence that is very assuring.

Indian markets in the last decade or even 15 years, if you take out any data point there has been no connect between the market and sentiment. Perhaps very little connect between the market and macros however one connect which time and again gotten reinforced for is the fact that each time emerging market flows have been very sharp, India in those particular years has done phenomenally well, other things remaining same.

The classic case in point being the year 2009 when they pulled in USD 30 billion by way of FII flows, which was more than 50% of the total money that emerging markets as an asset class attracted. Between September and October, 20% plus fund managers have gone overweight on Asia pack as a space and currently people are overweight on China to the tune of 26-27%, which was not the case even three months back. It could perhaps be a precursor of things to come and we had just about managed to attract more than a fare share of flows, going forward.

The next three months will be very sticky, the sigma event is not Greece getting ejected out of the euro or Italy defaulting because in think those are very far fetched, they will not happen simply because the constitution of European Union does not allow that to happen, but the six sigma is the way the geopolitical scenario is panning out. You have talks of Israel planning to strike Iran, Syria has been ejected out of the Arab League which could change the dynamics in the Middle East. Hence, these are the things one needs to be worried about. The geopolitical situation is far more a sensitive spot than perhaps the euro area which has attracted more than its fair share of attention, but clearly the perception there about countries defaulting is overdone.

Also read: RBI will intervene, but only to check Re volatility: Gokarn

Q: What do you think will be a level that the market will hold towards the tail end of the year?

A: It is very difficult to put a number whether we will stay in a band of 4700 to 4900 or go all the way down in a tailspin to 4200 or 4300. I don