Andrew Holland, CEO Equities, Ambit Capital has no high hopes on the budget as the market is slipping. Surprised by sudden steep fall of market, he sees high inflation in to be a major concern in India. However, he finds current levels as a buying opportunity. In an interview to CNBC-TV18, Holland warned that foreign institutional investors (FIIs) are likely to avoid companies with governance issues. âInterest rate cycle will begin to reverse in developed markets. Quantitative easing (QE2) is likely to end in June 2011,â he adds.He is bullish on capital goods space. Below is a verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. CNBC-TV18: Have we seen the worst for the Nifty, ten days back?Andrew Holland: I think so. I think we have got oversold very quickly. We saw that bounce back, I think we took too much harp on that bounce back. I just feel that was still overplaying the downside too much now. I think that fear is more towards some of the things that have been coming out, which have been a surprise for more so because everyone is talking about this kind of trade between emerging markets and developed markets. In my view, it will start to reverse soon. We could start to see flows coming back to India, even though we havenât seen much of outflows. I think that gives me a lot more comfort that we havenât seen a big outflow of foreign funds.CNBC-TV18: Do you start buying now or do you still wait out with the view that there is some pain left to play out and you could probably time your entry a bit better?Andrew Holland: Let me first start with the risks. There are two key risks. One is obviously domestic India and really the newsflow whether itâs on the 2G scam or any of the scams, any skeletons coming out of the cover to shot the market, you canât really capture. But if this is worst of it then obviously that is in the market already. I think the second risk what I have to say is really what's happening in the Middle East. I think those escalate any more and oil prices say go to USD 120 per barrel, itâs not just India and the rest of the emerging markets, which suffer, and it is global market as well. Without doubt that would push Fed into very difficult problems and thatâs what the European Union. It will start destroy demand across the board and that would effect the US. Just look at what's happening with the US at the moment and Europe, core inflation is starting to rise. So, any oil shock would be a global event. And that would obviously have risk taken off the table across the board including India. So that would be the two risks, which I would say, we have got to keep an eye on. But really at these levels, the risk/reward in terms of India is looking quite favourable. So, it might try and test up 5,200 again, but itâs not really what we are seeing. So, we would be looking to buy at these levels on the basis of three things actually. One is that with core inflation starting to increase in the western world as well, itâs undoubtedly going to happen that interest rates will have to rise at some stage. I think this will be a dampener on commodity prices and bring them down over the next quarter which is great for emerging markets. So, you could argue, therefore, that the interest rate cycle is about to change for the developed markets, just as Asia and the emerging markets are really towards the peak of the investment of the interest rates cycle. So, that would be the big shift, I think, from developed markets back to emerging markets, thatâs maybe a quarter away. But the other big event in the US is obviously QE2 will come to an end in June of this year. I donât think the Fed really has capacity to keep expanding its balance sheet so much and so, again because the tightening of liquidity that will affect the commodity prices and I think thatâs where we will see the shift towards the emerging markets. So, we might be a quarter away from that, but markets usually start to discount this very quickly. So unless the two risks, I talked about at the beginning, happen I think India will start to look more favourable, particularly at the valuations we are seeing at the moment and certainly within certain sectors and certain stocks which have been beaten down considerably just on the basis that we are going to see a margin squeeze.CNBC-TV18: On your point about liquidity, the fear probably is that those outflows, which the market fears, havenât quite started yet. So, come the next few months is when we will really see intense outflows from this market. What are you picking up in your conversation with institutional investors?Andrew Holland: I have always been a little bit surprised by the real extent of the fall and trying to work out whether we are seeing strong valuations in terms of the historical levels or earnings really have to be kind of brought down very sharply. We are not seeing that. Maybe you will see 3% to 5% downward movement in earnings. But I have always been of the view that India has been 2011-12 earnings story. So, whilst in this quarter we might be seeing some margin pressure, you have to look one year out and start saying what would the environment be there. My view would be that commodity prices and interest rates would be lower in India. Therefore, we will be seeing upgrades rather than downgrades. So, itâs really a phase where you are seeing pressures in India and those pressures in the western markets not going to the fore at the moment. I believe that those pressures in terms of inflation will start to play on the European and western markets and US markets going forward. Therefore, the interest rates cycle in those countries will have to rise. That will mean a shift from the developed markets back to emerging markets. Thatâs the key on a more optimistic view of the Indian markets.CNBC-TV18: How do you approach the infrastructure space? It has got hammered out of shape. Is this a space where you start buying or do you think they will make lower lows?Andrew Holland: We are looking at buying. Infrastructure is such a large space. We think there are a couple of sectors which look interesting at this stage and where we would be buying. Yes, execution has always been a problem in the past and remains to dog the sector. But really what's been lacking in this sector is order flow.We believe if India is going to continue to grow at its gross domestic product (GDP) of 8-8.5%, infrastructure is going to play a large part in that. Therefore, we will start seeing order flow coming through. Basically in the last month, the government had its hands on a lot of issues and this is one of them. We expect that would change very quickly. Usually as the orders start to flow through then share prices usually follow. So, we are less worried.There is some good value for so many stocks. I think I have to be a little bit more careful in terms of which sectors you buy within infrastructure. But capital goods would be a space which we like.CNBC-TV18: A large part of the growth in FY12 is premised in the fact that commodities will bail us through, metals, energy, those kind of sectors. Given what's happening though in China in terms of tackling inflation, would you be so sanguine about the commodity space, especially in the metal sector?Andrew Holland: No. I mean we are expecting that commodity prices will fall on the basis of what I mentioned before, higher interest rates in the US and Europe starting to come through in the second quarter this year. So, we do think commodity prices will fall, but it doesnât necessarily mean that itâs going to be bad news for the likes of Hindalco or Tata Steel because we are still expecting global growth to accelerate in the second half. Therefore, I would say that the global cyclical and therefore you could actually see good demand for that product in overseas market, which will offset some of the price declines that we see. That said initially, I think prices will underperform as that plays it out in terms of lower commodity prices. So, I am not really looking at commodities as a buy at this stage, but obviously we will get some value there going forward. I donât think in terms of the earnings for this year that everyone was really banking on huge increases in commodity prices. Therefore, I donât think itâs going to have a material impact on earnings forecast going forward.CNBC-TV18: You havenât been a big fan of the budget in the past. How low are expectations running this time around?Andrew Holland: I donât have expectations whether itâs any year because itâs really about taxes. The less you tell me there is going to be some big tax reforms which there arenât. We know itâs going to be a populist budget. I am really just looking at the current account and the fiscal deficit in terms of what plans the Finance Minister has to address those and a possible mention of any opening up of sectors which will encourage foreign direct investment. Those are the areas I look at. But each time we come to this budget, if the markets are stronger then our expectations, are overblown and too high. At this juncture, with the markets low, we donât have any expectations at all.CNBC-TV18: In your conversations with global guys, how much of an issue is this whole governance news flow? Are they worried about it? Is it interfering with investment decisions or is it the local investors or traders who are making a big meal of it depending on how itâs coming in, not so much the institutions?Andrew Holland: I think institutions face this not just in India, but globally, unless you have governance issues across the board. So, for most foreign investors, itâs a play on the margin in terms of that. Itâs a negative flow which will keep the markets down and therefore you it could also be seen as an opportunity. I think obviously there are certain companies or sectors where there is governance problem. We talked about it before in terms of the real estate sectors where most people have said there transparency is very low. Therefore, when it is low, investors are really not going to jump into those sectors with both feet until they figure transparency. So, I donât think we they are exposed to some of these companies or sectors in such a big way which would make them says, âI never want to be in India again.â I think it goes, the territory in terms of investing in emerging markets that there will be these types of governance issues from time to time. But broadly if you are looking at the governance issues making transparency better, itâs a process which is for the better. So, I think you just play through that. Maybe traders go for the short side and hammer down the stocks, when the bad news is there. But at some point it gets to a point where value is there and those shorts get squeezed very quickly. And thatâs why you see the markets rising very quickly once those shorts get squeezed. So, fundamentally, I donât think that the margins, it matters on the longer term view to foreign investors. But it plays on the sentiment in the short-term.