Indian indices may well have gained ground in the current calendar year, but Ratnesh Kumar, who heads institutional equities at Standard Chartered, is of the view that these are early days and a V-shape recovery cannot be expected. In an interview with FE?s Ashish Rukhaiyar, Kumar says that the market has bottomed out and fund-raising activity will pick up. Excerpts:

At the start of the year, brokerages were gung-ho about the second half. Is the view still intact?

The view is still very much intact. But if the actual improvement in economic variables happens in the second half or early next year, the market will try to discount it before time. If there is an expectation of a rate cut, then the market would react before the cut. Our view is that factors like the changing direction of rate policy, government activity in terms of trying to revive the economy and liquidity situation getting easier will play an important role. Obviously the Budget has introduced a few elements due to which inflation decline may not be as much as expected earlier. But if you can get inflation around 7% and better monetary policy support, you can get a slightly better economic growth in FY13. And that is the hope which is underpinning better market performance this year.

Institutional broking business, however, seems to be under pressure.

For Standard Chartered, institutional broking and ECM are a natural extension for the group, as the product capability was not there few years back. Not just in India but across Asia our equity business has been getting built over the last few years. You are absolutely right about the market environment being challenging. Globally, volumes have been falling and the markets have had to deal with a lot of tough periods. In India, apart from low volumes, fund-raising activity was also on a slow track. I think 2011 would go down as one of the slowest years in terms of primary market fund-raising. We are obviously part of the industry and if there is any slow trend then we have to deal with it. By virtue of being a relatively new player in the industry, we have been able to adapt our business strategies to the new market conditions. We feel that markets have bottomed out. We have seen a revival in volumes in 2012. The fund-raising activity has also restarted. But these are still early days and it is not going to be a V-shape recovery.

Do you expect RBI to cut rates on Tuesday?

While we still maintain our call of a 25 basis points (bps) reduction in repo rate on April 17 policy decision, RBI?s vigil on inflation is likely to remain pretty strong as the headline inflation has not come off as desired. Headline inflation will average marginally above 7% for Q1 2012 once the revised WPI numbers are released. Our economists still see a downside risk to the call of 75bps reduction in repo rate during FY13.

The corporate numbers have started pouring in. Are we through with the downgrades?

We have seen some amount of bottoming out in earnings, across Asia. If you look at the trend, we had a good recovery in earnings revision in the last 2-3 months. But the pace of recovery in the last one month has slowed down. For FY12, expectations started around 16-18% earnings growth for India and it ended probably at zero. So there was huge compression related to earnings expectations of FY12. For FY13, a 10-15% kind of earnings growth is being looked at.

How do you see the FII inflows panning out in CY12?

We will have net positive inflows in 2012, which will be a huge relief and change versus 2011. Though we have seen around $9 billion in inflows already, there is still a lot of headroom as FIIs as an universe are still underweight on India. Obviously, there have been some recent concerns related to taxation so getting that sorted out will be important for the sustainability of flows.

Is the GAAR issue having an impact on our flows?

India is no doubt one of the more attractive markets globally, but we still have to compete for global capital.

Even an uncertainty leads to investors holding back, inactivity and decline in volumes and trends that are not desirable in a growth and capital-needing market like India. So the markets are very keenly looking forward to some solutions on the GAAR issue.

Do you see significant action related to fund-raising?

If you look at the Indian companies, their debt-equity ratio is at a 10-year high. Ever since the global financial crisis hit four years ago, there have been only sporadic windows of opportunity to raise capital. To get our economy going again in such a scenario, we need equity capital. We have started to see a couple of transactions getting done. We are seeing some large block transactions as well.

We have already seen the IPO activity starting. The fact that these transactions are getting done is a positive sign that liquidity is available.