What is your outlook in the short and medium-term?

The chances of the Sensex touching a new low after the budget is bright. Whatever the outcome, the question is whether the market will find the budget offering credible solutions. The government has given enough signals about its good intentions, but it has not helped kick start the market. The government does not have much credibility. I see no reason on fundamental grounds for the market to head for a substantial upward rally. In the short term, too, the market lookspoised for a correction. Today, you have a fair representation of IT scrips in the Sensex at around 8 per cent. Infosys and Wipro have shot up substantially during the last month on speculative buying. A major correction is due in these stocks.

Were FIIs the backbone of the January rally? Are the historic high valuations of IT, pharma and FMCG stocks sustainable?

Yes FIIs were there in the January rally. Whatever new money came in - around $ 100 million - went into IT, pharma and FMCG. The rally has purely been the result of brute money power. So far as IT is concerned, we have a great global advantage. What has been touched is just the tip of the iceberg. A 50 per cent annual average growth here is clearly sustainable for the next four to five years. IT companies will continue to show a high growth. Margins may come down, but that will be made up by volume growth. The important ratio while evaluating IT sector stocks is the price to earnings growth.

In the pharma sector, there is going to besome nasty surprises. If any fund decides that the current valuations are not in keeping with the growth prospects, there is going to be a catastrophe. It can trigger a selling wave. At present, everyone has bought into the pharma scrips and the share prices have shot up substantially (helped by the low floating stock). The prices have shot up in expectation of the Patents Bill. Once the law is in, MNCs will be able to introduce new products. But, I don't think the profit growth as a result is going to be that phenomenal. Indians would not have the money to pay for the new product in dollar terms, which is the pricing strategy adopted by MNCs worldwide. The flipside is that MNCs may not price its products so high in India inorder to gain volumes. You cannot have a high volume and high price growth. There is, of course, good prospects for good MNCs with strong R&D growth. But not in terms of huge profits.

The FMCG sector is a different case altogether. It's profitability and high price ratio is not of recentorigin. Basically, it caters to the traditional needs of people and has high visibility. It's profit growth has not been like the IT sector; but given the lower risk involved, a high PE is not unreasonable. Stability and consistency is very important. I don't see much of a correction here.

Which other sectors do you think have substantial growth potential?

The only new growth sector that I can see is basic infrastructure. Cement, for example. A lot of restructuring is currently on here which could see an average growth rate of 12 per cent even if the infrastructure projects do not take off. One can expect a few surprises in the sector like Madras Cements. Another high-growth area could be power equipment manufacturers like Bhel and ABB.

To what extent do global events, like a possible Chinese devaluation, impact the Indian stock markets?

Today, we cannot remain unaffected. A Chinese devaluation would be disastrous. China competes with India on so many fronts - petrochemicals for example.At the moment, a Chinese devaluation looks unlikely, especially as the Japanese Yen has bounced back.

What is the outlook for the economy?

I don't see any major revival in the economy. The problems are much deeper. A very low business confidence, which originates basically from uncertainty on the reforms front and the capability of the government to implement the reform measures. What has happened is that people have invested money in traditional sectors like steel, cement, etc. without having made equivalent investments in basic infrastructure like roads. This has resulted in a glut in steel and cement, while the avenues of demand generation is choked. So, money is locked up without returns.

What are your expectations from the budget?

Once again the government will give some signals about its intention to carry out reforms and generate growth. I don't see much changes being made in the excise and income taxes. The government may try to expand the tax base, like bringing agriculturalincome under the tax net. I don't think there's much the government can do so far as market sentiments are concerned.