Ajay Bodke, Senior Fund Manager, IDFC Mutual Fund, feels that the US is not giving any good support for the market. The financial sector in the US continues to produce bad news day after day, so it will be difficult for the market to claw back strongly, Bodke added.

He feels that over the last few months one is extremely cautious on the market because there are strong headwinds that the market is encountering. According to Bodke, the market is facing headwinds such as high inflation and pressure on India’s fiscal deficit in FY09. Bodke also mentioned about headwinds like the withdrawal of liquidity by foreign institutional investors, year to date - that has been USD 7 billion flowing out due to massive reduction in global risk appetite for investment in equities in general and emerging markets in particular.

Excerpts from CNBC-TV18’s exclusive interview with Ajay Bodke:

Q: Is there more downside to the market from here?

A: Over the last few months we have been extremely cautious on the market because there are strong headwinds that the market is encountering and a few of them are as follows.

Firstly, persistently the double-digit inflation due to high commodity prices and a perception in the market of the inability and unwillingness to take hard measures to cut down on fuel and fertilizer subsidies in view of the impending elections.

Secondly, the expected pressure on India’s fiscal deficit in FY09 due to massive increase in off balance sheet liabilities due to food, fertilizer and fuel subsidies; farm loan waiver and 6^th Pay Commission recommendations.

Thirdly, the perception that Reserve Bank of India has fallen behind the curve in not being aggressive enough to increase interest rates to reign in the money supply growth and to slow down demand.

Fourth, withdrawal of liquidity by foreign institutional investors, year to date we have seen USD 7 billion flowing out due to massive reduction in global risk appetite for investment in equities in general and emerging markets in particular. Particularly those emerging markets that have large dependence on imported oil and large current account deficit, India being one of them. Also the valuations in certain sector have come off but they are still not cheap enough because of expected earnings downgrades and slowing down in all three engines of growth.

In addition to that we need to keep a close watch on the progress of monsoon because although the onset of advancement of monsoon was pretty strong, it has failed to keep pace especially in the independent areas. This month, the number of divisions with scanty rainfall has increased from 6 last month to 13 this month. The weighted average rainfall which was roughly 32% above normal last month is today only 15% above normal. States like Gujarat, Andhra Pradesh, and Tamil Nadu have received far less rainfall. Only the States of Punjab, Haryana and UP which anyways depend more on irrigation have received better than normal rainfall.

All these headwinds we need to keep in mind and the US is not giving us any good support. The financial sector in the US continues to produce bad news day after day, so it will be difficult for the market to claw back strongly.

Disclosures:

It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.

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