Ved Prakash Chaturvedi, managing director, Tata Asset Management, believes that India may be experiencing a slowdown, going by the industrial production numbers announced on Wednesday. Chaturvedi, the 41-year-old head of Tata Mutual Fund, which received three awards -- best in balanced, infrastructure and liquid fund (institutional) categories at the recently concluded Crisil Mutual Fund Awards, told Palak Shah and Rajesh Abraham, that equity markets are starting to reflect the poor economic growth. Excerpts:

The stock markets are showing signs of bearishness. What's your call?

We had a good run from 1996-97 to 2007. This is a 10-year long bull run if you take out the 1999-end tech-meltdown. Over this period, the market returns were much higher than economic growth. However, the equity markets should, at some point, reflect the economy.

The key developed markets are showing signs of a slowdown. I do not believe in the de-coupling theory. We are in a state of inter-connected economies. Over the last 10 years, there has been an integration of economies, globally. Due to risk aversion, money is being pulled out.

There is a loss of risk appetite. Most emerging markets such as Chile are highly export-oriented. They have a strong capability in manufacturing and exports. India and China are different as they have largely driven by domestic consumption and have a very different profile.

At some stage, the global pool of money, which chases high returns, will re-enter India and China as the stock prices come to reasonable levels.

Is volatility here to stay, as far as the Indian markets are concerned?

The volatility in Indian markets will take another 12 months to ease out. There are market cycles and economic cycles. We had a 4-year bear phase during 1994-97. The markets are still trading at reasonable levels compared to the one year forward price-to-earnings ratio multiple of 2005-06.

Moreover, there is still a lot of action in the markets compared to real bear phase of 1992 and 1995-97 when there was hardly any momentum. Business cycles precede market cycles. We are seeing signs of a slowdown in the IT, auto and textile sectors. The market is reflecting such a situation.

The January-March quarterly numbers (which will come out in April) will be the key. When the economy is growing at the rate of 8-9 per cent, it is not possible for the stock market to sustain at 40 per cent-plus year after year.

Companies are likely to witness a slowdown in growth this quarter. Some would not be able to grow at 50 and 100 per cent as they did in the past few quarters.

What are catalysts for the ongoing market turbulence?

There are three factors behind the current market turbulence. Global turmoil is a matter of concern. Apart from mounting credit issues in the US, the global commodity prices are at a peak. On the domestic front, economic growth is likely to slow down.

However, once the interest rates start coming down, the economy may start picking up. Moreover, the parliamentary elections scheduled next year may influence the markets. I expect the volatility to remain till a clear picture emerges.

Are you expecting the interest rates to come down and what is your outlook on inflation?

Inflation has been grossly underestimated. But with elections around the corner, there has to be an 'inflation management' mechanism in place.

You have an off-shore equity fund known as Tata India Opportunity Fund registered in Mauritius. How is it doing?

We collected over $1 billion from major Asian countries through this fund over the past two years. It's a continuous process and we are still getting money. We raised most of the money from individual investors. It is a fund of fund, which is equivalent to that of foreign institutional investors.

Where does Tata Mutual Fund stand amid stiff competition among domestic fund houses to increase Assets Under Management (AUM)? What are your future plans?

Tata Mutual Fund's AUM has witnessed substantial growth. It has gone up from Rs 1,000 crore (Rs 10 billion) to Rs 24,000 crore (Rs 240 billion) in the last five years, with an investor base of over two million. We plan to launch a natural resources fund at an appropriate time.