The pace of earnings upgrade in India has slowed and the news from the developed world is not so positive. Mint spoke to Vinod Sharma, head of private broking and wealth management at HDFC Securities Ltd, about the sustainability of the economic recovery and its impact on markets. Edited excerpts:

You have said before that this is a pseudo-recovery. Why?

A large part of recovery that we have seen across the globe has been essentially a function of the stimulus, whether it be the US or China. Chinese exports to the US would have been more severely impacted had the stimulus not been there to begin with. Even China’s consumption of commodities wouldn’t have been as much if the banks there were not aggressively lending. In India, the demand is (largely) genuine. (But) I believe some of the demand has been advanced on account of this (fiscal stimulus). Even then, sales (of the top 2,000 firms) were down 6% in the second quarter on a year-on-year basis. Unless we have robust sales growth, price-earnings expansion for the markets can’t happen. Now there is no room for cost-cutting and the coming inflation will not leave any elbow room for the Reserve Bank of India to not cut interest rates.

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And the impact on markets?

Going forward, expect countries to defend their turf and trade. This will mean the currencies are likely to be in turmoil. The past experiences of a weak dollar and rising commodity prices needs to be revisited. Commodities may no longer rise with dollar depreciation or the dollar itself may start appreciating. Dubai is not the last sovereign debt that may have failed. Expect this to be repeated elsewhere. There have been near escapes for Ukraine and Greece. If European banks do develop chinks, which they can because of their large exposure to the Middle East, the euro-dollar equation may change. Earlier this week, we had seen negative yields for the US gilts. That means the world is willing to pay the US to keep its money safe. A booming market and negative treasury yields don’t go hand in hand. One of them is wrong. And, I suspect, it’s the markets that need to correct.

Last time the unemployment rate in the US reached 10% in 1982, the Dow (Jones Industrial Average) multiplied three times in the next decade. Don't expect an encore (now). In 1982, the interest rates were at 14.5% and gradual cutting of rates brought about fresh oxygen into the economy. But with rates at 0.25% where is the elbow room? The Indian economy is robust, but it can’t exist in isolation. The gains seemed to be capped for the moment.