According to Khattau, "The Indian market is fundamentally undervalued. From here, the companies in our portfolio will show a 30-50 per cent earnings growth. Assuming the same price to earnings levels, the Indian markets should see the same growth. Over the last three years, the three sectors which have shown performance are industries, where regardless of the economy they were showing 30-40 per cent earnings growth and therefore, the stocks in those industries showed significant earnings growth".

"Today, as the economy is going to grow at a rate higher than 4.5-5 per cent per annum, cyclical industries such as cement, steel, engineering and others have to show growth higher than in the past, because that is where thefirst engines for infrastructure growth and GDP growth are going to come from," stated Khattau.

In this scenario, Khattau said that stocks in these industries will begin to perform significantly better, for two reasons. "First, earnings growth will increase, which means even if the price to earnings remain the same, prices should go up. And secondly, stocks are more likely to see a price to earnings re-rating as well. A lot of these stocks have been re-rated and are trading at relatively low p/e's. If the earnings growth picks up, these companies will be seen re-rated upwards", he added.

"Thus, two things will happen. We will begin seeing the earnings growth pick up and the p/e's go up. Consequently, we will see the indices climbing. Looking further from here will depend largely on investor sentiment and corporate sentiment, which also will be impacted by what happens in the forthcoming elections," said Khattau. So in this scenario, in the medium to long term, markets have a tremendous upside and in theshort-term, there will be bouts of volatility.

The FII money that is pouring into the Indian economy is definitely not `hot-money' looking at the cumulative positive investment into the country, he commented. If FIIs are looked as a group of investors, then they have been net positive investors in the economy even during the period of economic stagnation. Based on the sources from which the money comes from, it can be established that FII money is not `hot money'.

"FII money comes from two sources; either India-specific funds or regional/emerging/ global funds. India-specific funds, by their very mandate, will be fully or nearly fully invested in the Indian market at all points of time. The second type is the FII's regional/global/ emerging market fund, where the fund manager will invest at least some amount of money, according to the weightage given in the indices into India.

This money is pulled out according to the change in weightage or according to the redemption faced by the fund". If the Indianmarket continues to perform better than others in the region, India will continue to see inflows from FIIs. "Rupee is a managed currency, not a free floating one and RBI has consistently said that it will keep the rupee competitive viz-a-viz its trading partners. Therefore, we expect to see the rupee depreciated by 3-5 per cent per annum viz-a-viz the dollar", said Khattau.