Fidelity International, which manages nearly $280 billion for investors worldwide, is one of the biggest foreign institutional investor in the Indian markets.

Arun Mehra, the flamboyant portfolio manager of Fidelity International's India Focus Fund, which has a corpus size of $3.7 billion (as on December 31, 2006) in the Indian markets, tells Rajesh Abraham that the valuations of the Indian stocks are supported by a strong earnings growth.

Your comments on the Budget.

Generally speaking, no surprises. Most notably, the government reiterated it would keep inflation in check and would focus on improving growth by establishing different initiatives across a number of sectors.

Looking ahead, the government expects a FY08 fiscal deficit of 3.3 per cent, which I think is quite achievable.

What are the key positives in the Budget?

From a policy perspective, I believe the Budget was positive. It was refreshing to hear that the government is committed to investing in areas that need robust long-term growth, for example, sectors such as agriculture, education and health.

There is a strong need for the government to focus on rural India and it was pleasing to see that this is where the emphasis will be placed.

Are there any concerns relating to some specific aspects, which you think did not get the required attention in the Budget?

The concerns are not specific to the Budget. The Finance Minister has done his bit. The announcements have been largely positive and now what is important is to see the implementation of the initiatives and the creation of infrastructure.

What are the key areas which according to you will drive the Indian stock markets?

It is critical that the investment activity on the ground remains strong in service, IT, retail and power sectors as well as in rural infrastructure.

What are the sectors on which you are bullish in the Indian markets?

Our approach has always been bottom-up stock picking, which entails choosing stocks based on their own merits, not on what sectors they happen to be in.

If a business is fundamentally sound, has good growth prospects or is undervalued compared to what it should be, then we will want to own it regardless of which sector it belongs to. But if I had to pick promising sectors, I'd say healthcare, industrials and consumer-related sectors including media and retail.

Your comments on the valuation of the stock markets? Is it excessively priced?

While I agree that valuations are at the higher-end of their historic trading range, it is important to remember that these valuations are well supported by strong earnings growth as well as India's favourable macro-economic outlook.

The Indian market continues to be what I call a "buy-on-the-dips" market and we are positive on it for the long-term.