Mukherjee said the currency space needs to be monitored closely because the first sign of trouble usually manifests in the currency market than in the stock market.
Equity benchmarks may have taken a beating over the last couple of sessions, but it is early to call a trend reversal, Udayan Mukherjee, Consulting Editor, CNBC-TV18 said in an interview with Moneycontrol Editor Santosh Nair.
"It appears to be an emerging market sell-off right now. The fall in the Turkish lira has roiled sentiment. This could be either transient or could become a bigger trigger for emerging market contagion," he said.
"Asia so far has not reacted too badly. It is a situation that needs to be watched for a few days before one can conclude that it is a turning point for markets in the near term because of global fears," the veteran financial commentator said.
Mukherjee was of the view that movement in currencies globally needs to be monitored closely because the first sign of trouble usually manifests in the currency market than in the stock market.
"The rupee is flirting with 70 (against the dollar) and the RBI has defended it well over the last couple of months," Mukherjee stressed.
"It is an evolving situation. It could develop into a bigger problem, but it is not already a big enough problem that people have to cut all their long positions and go short on the market," he said.
If Asian currencies continued to weaken because of global news and the rupee breached 70 to the dollar, it could be a trigger for some kind of panic in the market, Mukherjee said.
"The first indication will come from the dollar index. If the dollar index strengthens to 97-98, you could have a problem on your hands.
The support that the market was getting from foreign institutional investors, could diminish. The Nifty rally from 11,100 to 11,400 was driven as much by FII money as much as it was by local mutual fund money. Over the last week, mutual fund buying has eased a bit, while FIIs have been buying heavily," he shared.
So, if FIIs flows taper off, or even turn negative, the market could face technical pressure, he said.
Mukherjee expects the market to be volatile over the next few sessions.
"Traders who bought the dips over the last few weeks have always been rewarded. So most traders would not want to go short on the market immediately, unless something goes wrong with this strategy. So you will see traders buying the dips, and if the market fails to sustain, you could see heavy shorting at higher levels. That will make for a lot of intra-day volatility," he said.
While inflows into mutual funds have eased a bit over the last couple of months, Mukherjee said it was not a cause for concern as flows into systematic investment plans were still robust.
“If global news turns negative and mutual fund inflows slacken, you could have a liquidity problem. But I don't see mutual fund inflows falling off a cliff,” he said, adding that the bigger trend decider could be FII inflows.
On the rally in banking shares, Udayan said the general view in the market was that the worst was over for corporate-facing banks and their declared asset quality was also improving on the margin, and therefore dips in the corporate banking space should be bought.
"Whenever you see non-watch list slippages, the market tends to get worried about the extent of the problem," Mukherjee said. “The wrinkles in the SBI numbers were twin. One is the non-watch slippages and two, their core business growth is anemic," he added.
Mukherjee is of the view that when it comes to corporate banking, private sector banks seem to have an edge over public sector banks. But he had a word of caution for new investors.
"Most stocks have already rallied 20-25 percent and that is something investors eyeing fresh investments in this space should bear in mind," he said.
On Coal India’s good quarterly showing, Mukherjee said the lower-than-expected e-auction volumes was a cause for concern. "That (e-auction volumes) is the life blood of Coal India. Optically, the numbers might look good, but e-auction volumes falling short of expectations could cap the upside in the stock," he said.
On the aviation sector, Mukherjee said Jet's problems could reduce the competitive intensity for Indigo and SpiceJet, but their recent numbers have not been encouraging."Yields have not been going up despite higher load factor. This is something that the airline factor will have to address to be able to create sustainable wealth for investors. Else, there will be tradeable rallies and the stocks will come down," he said.