Malik believes that the Finance Minister may abstain from hiking service tax rates. He expects more services to come under the Service Tax net.

Malik expects the FM to remove 10 per cent surcharge on corporate and personal taxes. In his view, the Budget may increase allocation to agriculture and infrastructure. Moreover, he expects Budget to lower customs and excise to tame inflation.

He also adds that RBI may have to cut SLR some time this year. He further mentions that there is a concern over the market being sanguine about earnings growth.

Excerpts of CNBC-TV18's exclusive interview with Rajeev Malik: 
 
Do you think those fears are legitimate that the Finance Minister may actually do something or sound quite dire steps on inflation?

Some moves will clearly be there, certainly in terms of the customs duty, cutting certain other duties, excise duties etc. I don't think they will necessarily go all out and start talking about restricting a variety of different things. We know that the Budget traditionally is not necessarily an inflation fighting forum. It so happens that in India's case, because it is still deregulating its import tariff structure, there is scope to offer these reductions, which can offset some of the inflationary pressures emanating from other side.

So yes, they would be clearly there, inflation worries will also stay in the Finance Minister's hand in terms of hiking any tax rates. For instance, service tax rates is a pretty strong case for increasing that, but I think while he will increase the number of services coming within that, he is unlikely to hike the rate this time at least.

At best then, how would you approach or term 'the Budget' as an event - neutral, positive, negative? What is it for most markets?

I would definitely label as likely to be a positive Budget and its important to spell it out a bit in the sense that I don't think there will be any tax increases. There is a very good chance that he actually goes ahead and removes the 10 per cent surcharge on corporate and personal income taxes. He goes ahead and does a bit in terms of cutting inflation by cutting import duties etc. Two most important aspects - one, he sticks to the FRMB target, I think he gets lot of credit for that despite a very bullish growth environment etc and two, increased allocations as far as infrastructure and agriculture are concerned. So it's a Budget that tries to address some of the very near term concerns but at the same time it also continues to lay the foundation for further fiscal consolidation and tries to remove some of the impediments that continue to hold back growth overall.

From a more macro perspective, do you expect to see anything significantly positive which the market may take away tomorrow in terms of either a thrust on agriculture or infrastructure which might have positive ramifications for many sectors?

I think we might be surprised by how strong a push they end up giving both to infrastructure and agriculture. But at the same time, you have to appreciate that this is a market, which has been priced for perfection for a long time and a lot of good news is already being discounted. If there is anything, in India delivery is never as smooth. So I think overall the thrust on increased spending clearly in terms of infrastructure and I think one of the noble aspects of this Budget could just be trying to address some of the problematic issues in terms of project financing and these two sectors. So I think there could be more incentives, creative options etc that somehow tries to address that impediment.

How have you read this atmosphere of hardening interest rates and is there a case to be built for lower growth now?
 
Our view for sometime has been that as far as interest rate hikes are concerned by RBI, is very much done because hiking policy rates more only creates more problem for it by bringing in more inflows, CRR is going to be the way forward.

I also do think that a lot of the worries we are having on inflation will begin to ease somewhat starting as early as this Friday but the headline WPI inflation will really come-off more meaningfully only in early April and that then would set the stage for, is the RBI done or is it time to some how loosen the liquidity conditions.

What we are seeing now for example over the past few days is money market liquidity has improved quite substantially, I think this is really in the run up to the Budget and trying to make sure there is no untoward incident overall. But I think for now they are still fairly focused in terms of keep liquidity tight although come Q2 there is likely to be a shift on that on that front.

Just forget about WPI for the moment, if you just look at latent and unmeasured inflation and inflation risks in the system, could it be the case that overall inflation is stickier than most people are more stubborn than people are assuming it will be?

I think the underlying drivers are really where the differences are. I do think on a seasonal front some of the agriculture prices will come-off, they may not come-off as much as they have in past years for variety of structural and cyclical reasons. I do think the kind of tightness that we are seeing, will have an impact as far as growth momentum is concerned.

One of the surprising things in India is that the broad view that RBI can tighten as much and it would not do anything to growth and that is outright irresponsible if anyone is telling you that. There is bound to be a momentum clearly on the housing side, banks will start talking about slower loan growth and in the next few months the focus will increasingly shift that has the RBI overdone it to some extent and then what do you do about that.

Tactically, what would the call be on the bond market now?
 
Depending on what the borrowing numbers land up is, our own sense is continued fiscal improvement spells a fairly decent outlook. The critical issue of course which continues to be at the back of most of the players is a) in terms of the liquidity conditions and RBI has made it clear that it will step in and use CRR every time its intervention results in a substantial easing and b) some point later in the year, what they land up doing as far as the SLR itself is a concern. I have no doubt in my mind that some point this year, probably mid to third quarter, RBI will have to cut SLR.

What do you expect to see from companies in general? What is your sense of what companies may start reporting in 3 or 4 quarters down the line in India, particularly companies who are domestically focused?

As I said earlier, it is a market that is priced for perfection and a lot of good news is already factored-in and we have gone through almost three years of earnings of beating expectations. Now, you have situation where headline growth is likely to roll over and at the same time, you are going to have increased margin pressure.

So my biggest worry would be in terms of markets generally overestimating or being too sanguine, optimistic about the earnings growth momentum and that can happen despite not a very substantial slowdown as far as growth momentum is concerned, even if you were to talk about on average 8 per cent growth for the next 12-15 months. But some of the other issues I mentioned are still playing out, there is bound to be an impact as far as the profit cycle is concerned.

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