Indian markets to fall further? While investors are concerned about valuations, lack of tailwinds from RBI and higher oil prices, stocks are likely to benefit from recovering earnings, supportive government policies and strong fund flows. Valuations remain well above long-term averages, and hence, the earnings recovery and continued strength of domestic inflows remain key for market performance. fears of rising inflation and more aggressive Fed rate hikes are exaggerated and we expect markets to fully recoup the February losses driven by strong earnings growth with boost from US tax cuts and solid global growth momentum. Finally, policy normalisation by the Fed, ECB and Bank of England is likely to be gradual, despite market fears.

Road ahead for fund flows into Indian markets after the government reintroduced long-term capital gains tax on equity: We expect fund flows into India to remain healthy despite the government’s decision to reintroduce long-term capital gains. Global investors are likely to be focused more on the fundamentals of the economy and companies, rather than being fixated on capital gains tax, which are common in other major markets. The imposition of a modest capital gains tax could even be a positive as it may limit extreme trading activity.

On India’s banking and financial system: The recent bank scam in India has not changed our confidence in the country’s overall banking and financial system. While the magnitude of the scam seems large on absolute basis, it is very small as compared to the overall size of the banking system.

Preferred investment themes in India: Within India, we are looking at metals and materials sector mainly because if you are having a lot of infrastructure spending on roads, there will probably be strong demand for the materials sector. We also like rural themes, like fertiliser, as the government is trying to shore up the income of the rural sector. The consumer sector story is still there but it is much more of a longer-term story. In banking, the bias is a little more towards  the private banks. Globally, we like the Industrial sector, the financial sector, especially banks, and the IT sector.

Outlook on Emerging Markets: This is still a positive environment for EMs because stronger US growth, Europe and Japan growing at an above-trend pace should lead to stronger commodity prices and that should support emerging markets and also EM exports. EMs have also been growing at a good pace. They will continue to grow at a solid pace. In India, growth slowed down a little in 2017. So, we should see a recovery in growth in India in 2018.

Is the phase of low volatility in global markets over? Volatility has been artificially low and that may be reflecting in complacency in markets and also because some market participants were betting on volatility remaining low. However, we have seen a big rise in volatility in February this year. We may see volatility rising further, if we have more aggressive rate hikes by central banks or higher inflation or increased geopolitical tensions.