India is not adequately prepared for another major global financial crisis, says Nirmal Jain, chairman, IIFL. In an interview with FE?s Ashley Coutinho, Jain says broking industry will have to reinvent itself and brokers will have to diversify their offerings to survive in this market. Excerpts:

Indian equities have remained volatile in the past few months. How do you view the situation?

The market has corrected significantly despite the fact that overseas investors have not sold much. FIIs have been taken by surprise by the sudden rupee depreciation and their dollar denominated portfolio has taken a huge hit. India needs FDI and FII inflows because structurally our imports are more than exports. We have a huge trade deficit and our current account deficit runs as high as 4% of the GDP. In fact, we are the only country in Asia to have a current account deficit. This kind of deficit requires sustained capital inflows. The rupee depreciation creates a vicious cycle in that if the rupee falls, FIIs will not bring in more money, which in turn means that the rupee may fall further. The policy framework needs to become more conducive to attract FDI and FII money consistently. Unfortunately, the government has not been able to do much on FDI in retail and insurance.

The broking industry is facing tough times. How do you assess the current situation?

The broking industry will have to reinvent itself as the traditional transaction-led model has come under tremendous pressure. Broking rates have plummeted, volumes have shrunk and volatility has become the order of the day.

Given the present situation, most of the broking firms will have to diversify their offerings and brokers will have to double up as financial advisors or planners. While top brokers have not shut shop many have scaled down their operations. Brokerages that are well-capitalised and have well-established risk management practices in place do not have to worry about going bust.

Do you expect overseas money to come in?

It?s difficult to predict. It is quite possible that money may flow in, easing pressure on the rupee. At the same time, you cannot overlook the fact that the euro zone is currently passing through a difficult phase and the latest numbers suggest that growth in Europe is slowing down.

If the crisis in the euro zone escalates, the risk trades will come off and risk aversion will soar, putting the brakes on inflows to emerging markets such as India. We are running a huge risk today because we aren?t adequately prepared for this kind of a situation. Our currency has already taken a hit, the RBI reserves are limited and the government seems clueless.

What is the way out?

When rupee depreciates like this, a lot of speculative pressure is built up. It?s a structural problem but it?s also a psychological one. The intervention from the RBI has to be meaningful. A few 100 million dollars here or there will not get the desired result. They need to do a quick 10 billion dollar sale of US dollars as that will ease speculative pressure and diffuse the panic situation. On the reforms front, the government has to increase the prices of diesel as the diesel subsidy is massive. About 80% of our crude oil requirement is met by imports and on top of that there are subsidies. Also, the government must increase duty on gold imports by up to 10% and then create a conducive policy framework to boost exports in services as well as manufacturing. There should be a framework to bring in FDI in a consistent and sustained manner. We have to admit that we are desperate for forex and need to take the necessary steps towards. If the key offices of the government are in denial mode, we are headed for a disaster.

Do you expect more downgrades in coming quarters?

The fourth quarter results were mixed and the slowing economic growth will impact results in the coming quarters. So there will be some downgrades. Sectors such as capital goods, infrastructure, real estate and commodities will continue to remain under pressure going forward. Commodity prices might have come down but they haven?t come down as much as one would have expected them to.

Does our consumption story look wobbly at this point?

I would think so. The consumption story might not sustain for long because pumping in money by way of schemes such as NREGA or giving more credit to rural areas is not a sustainable model of growth. What?s needed in a growing economy is more productive capacity and more capital formation.