Mumbai: Despite Tuesday’s sharp fall on Indian and global equity markets, Citigroup Inc. is positive about Indian prospects, which are backed by sound economic fundamentals, says Aditya Narain, managing director and head, India research, at the US bank. Narain, however, said in an interview that overseas uncertainty could drain money out of India and pull the market down in the short term. Edited excerpts:

Have the financial concerns in Europe altered your views on the performance of the Indian market?

Not in any meaningful manner. In fact, very recently, we have become much more constructive on the market, in part because the market has come off a reasonable amount and in equal measure our sense is that at the real economic level, there shouldn’t be a difference... Valuations are, I wouldn’t say necessarily attractive, but they (are) clearly not expensive.

Cautious look: Aditya Narain.

Do you see a shortage of liquidity in the market?

The pain will be out of money flowing out, so it will be in terms of the market not effectively holding. I do not see the real impact being all that meaningful, but that’s where there could be pain. But at the end of the day, the market through the year has prospered simply because there has been a lot of offshore money coming in.

When the year began, the interest rate factor was looked upon as a principal risk for the equity market. Now bond yields have cooled down. Do you think the view now is that 125-150 basis points (one basis point is one-hundredth of a percentage point) of hike will get staggered over two years?

We are not pulling back in terms of our expectations of hikes in the current year. We are still saying 75 bps will happen over the course of the year. Into the next year, where we were anticipating about almost 100 bps in the first part of the year, we should get a pullback to about 50 bps.

Are you talking about the first part of calendar 2011?

The pace of increase into the next year has been pulled back and the extent has been pulled back. In the current year, we think there is normalization that has to happen and that will actually continue irrespective of where bond yields end up.

Has equity market priced that in?

Our sense is in reasonable measure. I would tend to believe it’s not priced in 7.5%. If it had the market would have been a little higher. It has, at the policy rate level, kind of factored in and the rates will go up 75 bps as we have it.