The equity market could see a bit of a revival in the second half of the year, says A Balasubramanian, CEO, Birla Sun Life Mutual Fund. In an interview with Ashley Coutinho, he says a few reforms are needed to revive the interest of overseas investors. Excerpts:

What is the outlook for the Indian equity market?

Since the beginning of 2012, we have held the view that the second half of the year could see a bit of a revival in the Indian equity market despite global headwinds. This view is largely driven by the fact that the interest rates could decline in the year ahead. The RBI expects the Indian economy to grow at 6.5% in FY13 and we expect the GDP growth numbers to bottom out. These two factors will revive activity in the capital market. Policy reforms, if any, by the government could also act as a support.

What are key concerns for the market?

There is room for improvement on the fiscal side and the government ought to kickstart policy reforms. Steps should be taken to attract foreign flows, which will have a positive impact on the currency. Lastly, policy initiatives should be targeted at taming inflation. High inflation continues to remain an area of concern, especially for the savers. Poor monsoon, therefore, potentially can keep food inflation high and limit the ability to correct fiscal deficit. Policy initiatives need to be directed at ensuring effective use of grain stocks to tame inflation.

What are the global cues to watch out for? How grave is the threat from Europe?

The global economy is still going through a challenging phase, which is reflected in the subdued commodity prices. The global economy could face headwinds for a prolonged period given the fact that every country has to focus on severe austerity measures. We are yet to see concrete steps being announced to revive the fiscal situation. The ECB should step in to give the necessary support to the banking system sooner rather than later to avert a severe crisis.

What is your outlook on FII inflows?

FIIs have already purchased shares worth about $11 billion. The global liquidity remains high and the interest rates back home are on the higher side. In terms of GDP growth, India is doing relatively better than most developed countries and our valuations are also reasonable at this point in time. So, if some of the reform measures come through, we might see renewed interest from overseas investors in the year ahead.

Are you concerned about the number of folio closures in the past year?

Folio closures are largely a function of scheme mergers. The mutual fund industry has been facing headwinds for the last year-and-a-half as volatile equities have kept investors from participating in equity schemes.

Even today, 95% of the population is not invested in the capital market. One can look at it as a challenge or as an opportunity. While folio closures are a reality, one must remember that new folios are being added in the fixed income space. We believe that there is ample scope for expanding the market. The capital market does not constitute just equity and it makes sense to attract investors who have predominantly invested in equities or bank fixed deposits to look at fixed-income products in the mutual fund space. We are doing our bit through initiatives, such as Recurring Savings Plan, where people can invest in small amounts in schemes that predominantly invest in bonds issued by the government or reputed Indian firms. We believe that plans such as these will help bring back investor confidence.

What is your advice to retail investors at this point in time?

The equity market has been volatile, no doubt. But staying away from the market is not the solution. It is a question of getting the asset allocation right. An individual?s financial growth needs to be worked out, keeping a goal in mind, and cannot be determined solely by the state of the markets.