Expectations of continued capital inflows and a stable government after the 2019 general elections are among the key factors that the Indian market is pricing in currently, said Nilesh Shah, managing director, Kotak Mahindra AMC in an interview with CNBC-TV18

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An improvement in the liquidity scenario, possible interest rate cuts by the Reserve Bank of India and a better transmission of credit are also driving the market sentiment, he said, adding that if there is any disconnect in terms of liquidity, to rates, to transmission to flows then certainly market looks little bit ahead of its fair value.

Talking on debt market troubles and series of credit events wherein Reliance Capital and its subsidiaries, along with PNB Housing being put under credit watch, he said the main issue is tight liquidity.

“Banking system is short of liquidity by Rs 100000 crore plus. Normally post March 31, the government spends money and that money floods the market by April but this April it has been quite different. Secondly, there has been pressure on refinancing for many companies because of tight liquidity they haven’t been able to refinance their debt. The third problem has been the transmission of liquidity,” said Shah.

“So there will be challenges for the debt market in the days to come but we believe like September-October 2018, which we navigated well enough, we should be able to navigate these troubled waters also,” he said.

With regards debt fund inflows, he said by and large they have remained intact although overall liquidity has remained short, someday Rs 100000 crore, someday Rs 69000 crore but within those liquidity constrain debt inflows have remained intact. However, the debt inflows are more towards liquid, liquid plus short-term, ultra-short-term where we don’t take the kind of credit risks being talked about. “Our credit risks are focused towards those funds which are mandated to take credit risk, which is less than 5-7 percent of our total AUM,” he said.

According to him, flows into credit risk funds have slowed down but flows into all other debt funds has been healthy.