Indian market at mercy of FIIs; global cues key: Udayan

Post the Lehman Brothers' filing bankruptcy that led to the widespread global financial crisis in late 2000, every equity markets has started eyeing global cues more cautiously. The Indian mkt has in the past two weeks seen humungous amounts of funds been take out. This liquidity offtake from foreign institutional investors  (FIIs) led to the Indian volatility index (VIX) or the fear gauge indicator seeing a high of 19.85 -- a level last seen in June 2012. What has hammered the Indian market is also the rupee’s consecutive fall over the past week.

"That is the fear that a lot of people have that at some point what we have seen for the last two-three weeks is just a trailer of a film playing out globally which is that liquidity constricts. This could hurt the rupee, the stock market and we have also seen many blue-chips actually correct quite significantly over the last couple of weeks which is what may happen to a greater extent if FII money stops coming in or sells of to a certain extent. So the global picture is very important," says Udayan Mukherjee, managing editor, CNBC-TV18

He adds that the current slump in the market is due to lack of retail participation apart from the rupee’s steep weakness. He says as global liquidity isn't a given anymore, the rupee’s weakness doesn’t help concerns of India's widening current account deficit (CAD).
He says though FIIs are positive on Indian from a one year perspective, lack of retail participation is hurting the market. Below is the edited transcript of Udayan’s interview to CNBC-TV18. Q: This has been one hell of a month right? 
A: It is a bit bumpy in the market as well. Atleast Friday was good but the Dow was down 100 points last night. I think it will remain this bumpy and choppy for a while. Q: Durably because that has really how the year has been, bumpy, choppy, lots of good and bad news, really a manic.
A: There is reason for that, because sometimes we are getting good news. Like earlier in the year we saw commodities sell off. Some good things also happened on the policy front, people started hoping that our current account deficit (CAD) problem would get resolved and then as the year has progressed, we have seen some headwinds coming through from the global front.
Global liquidity is not a given any longer. With so much damage in global markets, we have seen crude staying stubbornly at USD 106 per barrel now with the rupee having fallen to 58-59 against the dollar. So, I don't think that bodes very well for our CAD either. There are some headwinds right now which is why the market keeps having these hope rallies to 6100-6200 and then they get nervous once again because it is difficult to move beyond that on the valuation front immediately.
The moment an earning season happens, everybody starts sulking then the currency is doing its own number. Globally, liquidity is drying up and then the market sells off once again back to 5500-5700. The moment the market comes to 5500, selectively valuations start looking attractive. Some longer-term money comes in and the market moves back. So, we are just moving to and fro in the 600 points range and that is the way it appears it be for a bit longer.
The risk is that because things are still not great on the ground and if global liquidity does not remain supportive, at some point, the floor of 5500 could crack and the market could go lower. It is not a certainty but a probability which I think is keeping a lot of people awake at night. Q: Ever since the Lehman Brothers crisis something has changed in terms of how much we have to watch global trends. I am sure people get confused every morning when we talk about the South African Rand, US treasury yields, what is happening with Asia but really it is all coming together. A lot of what we are living through is global in nature.
A: That is the problem. However, one good thing is that despite a lot of people believing that India is going through a bad time right now as it has been for the last many quarters but most people believe that this is probably the last bit of the pain locally. It may not be done yet, but the way growth parameters are, we may we go through two-three quarters of pain. However, most investors seem to be in a mood to look beyond that for India.
The more one talks to people, they say that though things are not great but they think we are in the last 25 percent in terms of time with Indian pain. Therefore they say they can take a call one year hence, put in some money, wait through the volatility and let the market go up and down. But eventually, it will breakout once we get the first glimmer of hope.
The problem is compounded by the fact that India has no investors in the market barring the foreign investor. The hall is full but I don't know how many people are buying equities actively in the local market. Q: Someone pointed out that most of them actually turned out to ask when they should be selling.
A: That is the local mood. So, this market is about the shallowest that we have seen in many years. There is one guy standing and buying and that is the foreign investor. So, the market is so shallow and the fact that from a macro perspective as well we need this foreign money to come in else the monster CAD cannot be fed.
The moment the market feels that more money will not come in one can see the nervousness in the currency which is the rupee keeps going back to those 60 levels. So, in terms of feeding the market and in terms of feeding the CAD which is macro and technically, we are very dependent on flows this year.
One can take a call that India will go through six more months of pain and then slowly, things will start improving but in the interim, if there is a technical adjustment of liquidity globally, then the market can still come out very sharply presenting a big buying opportunity.
That is the fear that a lot of people have that at some point what we have seen for the last two-three weeks is just a trailer of a film playing out globally which is that liquidity constricts. This could hurt the rupee, the stock market and we have also seen many blue-chips actually correct quite significantly over the last couple of weeks which is what may happen to a greater extent if FII money stops coming in or sells of to a certain extent. So the global picture is very important.