Despite near-term pain and pessimism, the Indian equity market is likely to see some rebound in the second half of 2012, says Devesh Kumar, MD & head?equities, India, RBS. That?s because inflation and interest rates will begin to trend downwards, and corporate earnings will improve, Kumar tells FE?s Ashley Coutinho and Ashish Rukhaiyar. Overseas investment, though, will remain subdued this year unless India?s growth story gets back on track, he adds. Excerpts:

How do you see the Indian equity market in 2012?

We expect 2012 to end better. The year has opened with extreme pessimism among investors and it emanates from high interest rates, inflation and a slowing economy. There is also disappointment with delays in government decisions on economic matters related to infrastructure, investment in retail and the implementation of GST. We feel that in the run-up to the Budget and the five upcoming state elections, we will see the bottom. The second half of 2012 will see a rebound as inflation and interest rates trend down and the backlog of pending decisions starts getting cleared gradually.

The rupee is also likely to strengthen from this point. We expectQ4 earnings season to be the worst after which earnings will improve and forecasts may be revised upwards.

What are your expectations from the Budget?

The failure to get FDI in retail approved and the inability to get a number of financial Bills discussed in the Winter Session have lowered expectations from the Budget. Positive proposals in the budget, however, small, will please the market big time. Any growth boosting decisions will be welcomed by the market.

What is the outlook for FII inflows this year?

FIIs are looking for opportunities to participate in the Indian growth story. India may be growing faster than other emerging countries but our growth estimates have been revised down from 8-9% to sub-7% levels. We don?t expect big FII inflows in the first two months as there is a lot of pessimism. We don?t expect them to withdraw big money either.

What are the global cues to watch out for?

There is a growing consensus the US is not heading into recession but the recovery from here will be slow. The main area of concern is Europe. Hopefully, the troubles there will abate by the February end and the fate of EU will be known. As far as India is concerned, I don?t think the Indian capital market is suffering because of problems in the euro zone. Our problem is more due to a lack of conviction in the sustainability of growth here.

The government is looking for new ways to raise money

Given the current market conditions, it will be very difficult for the government to raise money through disinvestment this fiscal. However, the move by Sebi to introduce new instruments for fund-raising is positive and will be effective once market sentiment improves.

Which sectors do you like?

Defensive sectors will underperform this year while interest rate-sensitive and infrastructure companies with annuity income will outperform. One should be careful while selecting stocks and due weightage should be given to the quality of balance sheet and corporate governance.