'Inflation can eat into the India growth story'

Arun Khurana, Fund Manager, UTI Mutual Fund says, the robustness of FII flows into India would largely be contingent upon the cooling off of inflation.

How are the foreign institutional investors (FIIs) viewing developments in India? Will they continue to invest in the Indian markets in FY12?

The FIIs, after being bearish on India since November 2010, turned positive post the Union Budget presentation, which largely addressed the challenges relating to growth and liquidity despite surging inflation.

We are cautiously optimistic regarding the continuance of FII flows in Indian markets in FY12.

Since India is the only large economy after China (which of late seems to be running out of steam to sustain its growth momentum), which has a potential of logging double-digit growth in FY12, it should remain a focal point for FIIs.

The robustness of FII flows into India would of course largely be contingent upon the cooling off of inflation, which has the potential to eat into the larger part of India's growth story.

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China reported a marginal slowdown in its GDP growth during the first quarter. How are you viewing this development?

A slowing down Chinese economy (if at all) on the contrary should in all likelihood be a blessing for the Indian economy.

A slowdown in the Chinese economy should deflate commodity prices, which should help the Indian economy to get out of the commodity prices spiral.

With nominal growth being the same, a run down in overall inflation could boost the FY12 real GDP growth rate to upwards of 10 per cent, which should result in robust capital inflows, abundant liquidity, lower interest rates.

The resultant lower interest rates should turn around the investment cycle leading  to significant creation of fresh capacities, which should considerably  ease down the supply led inflationary pressures and in the process boosting the overall growth prospects of the Indian economy.

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How have you churned your portfolio in the last six months? Which sectors got included and which ones fell out of favour? What is the strategy for the next six months?

As a portfolio strategy, I look forward to increasing weightage in favour of PSU banks.

Is it safe to get into the midcap stocks at the current levels?

Within the banking space, we are likely to witness the emergence of quite a few midcap investment opportunities during FY12.

We are also bullish on some of the auto finance focused small-to-mid cap non banking finance companies (NBFCs) particularly in the light commercial vehicle (LCV) and heavy commercial vehicle (HCV) space.

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What is your view on the way crude oil prices and the prices of precious metals (gold, silver) have been behaving in recently? Where do you see them settling?

I am bearish on crude oil prices and expect them to settle between $100 and $110 a barrel over the next six-nine months.

However, the possibility of a short-term upward move in its prices may not be ruled out in the light of lack of consensus regarding the possibility of a slowdown of the Chinese economy.