Many brokerages have said Indian markets are rallying to new highs on the possibility of a BJP-led government at the Centre after the next elections. CLSA is one of them. Narendra Modi is an activist; there’s no energy problem in Gujarat, and the bureaucracy is result-oriented, says, managing director, equity strategist at CLSA, explaining market’s fascination with BJP’s prime ministerial candidate. On the more fundamental issue, Woods believes, if India’s investment cycle comes back, then the key issues of fiscal deficit or current account deficit will be solved. Edited excerpts from an interview withIndian markets are going up because Narendra Modi is going into national elections. Whether people get this right or wrong, there’s a sentiment about it. Corporate India expects investment-driven growth to government’s prioritising various forms of rural benefit schemes. The opinion poll suggests that 90% of Indian corporates prefer the Opposition party. The private sector businessman supports the current Opposition party.A year ago, I was told that Modi won’t be a national candidate, but I thought he will be the national candidate. Six months ago, I was told that he won’t have national appeal, but I thought he will have national appeal. What’s impressive about Gujarat is its investment-driven growth, and it’s not based on one sector. Modi is an activist; there is no energy problem in the state, and the bureaucracy is result-oriented.In this election the key point will be - the level of majority, or how many seats Modi wins, because there’s a difference between marginal win and a decisive win. The problem right now is - if you are long on Indian markets based on momentum and the information from media coverage, one may go wrong as there are six months to go for the elections. The key issue in this election will be: how the rural votes work. The opinion polls in the last two elections were totally unreliable. The food security bill and cash transfer to rural India are crucial.I am not expecting any meaningful tapering, though there might be some symbolic tapering in the US monetary policy. My expectation is we will continue to remain in the QE world. I am not expecting US economic growth to accelerate as much as the market consensus. This year, investors have chosen to believe the US Federal Reserve’s forecast on the economy.The Federal Reserve has been wrong on forecasting the economy since the financial crisis of 2008. The Fed has forecast that the current year’s economic growth is going to rise to 3% from 2%. But my assessment about the US economic growth is that it’s going to stay at 2%. If the US economy does not recover as much as people are expecting, then some time in future rather than tapering, policy makers might have to accelerate quantitative easing.The foreign fund flows into India will primarily be driven by whether there will be a new investment cycle or not. Otherwise, India will remain very volatile depending on the US economic data. In the absence of a pick-up in investment cycle, India will be very volatile based on investors’ expectations on tapering.The markets have rallied on Monday because Federal Reserve has signaled that tapering is not happening any time soon. But the moment it becomes evident that India has got an investment cycle, markets will become less vulnerable to the tapering talks in the US because there would be domestic reason to invest in India.If the investment cycle comes back to India, then key issues like fiscal deficit or current account deficit will be solved. You will get the growth, tax revenue will pick up, deficits will become manageable, and then all these issues will get solved. Foreigners will want to invest in India. India will be much more resilient to any external shocks, just like India was resilient between the years 2002 and 2009.Between that period, India had its investment cycle and was the best stock market story in Asia. In terms of new investment policy, you need more transparent bidding system. India is going to have an investment cycle sooner than later.I would advise investors to invest in quality stocks, though they are expensive. But, if one has patience with a three-year view, then I would suggest investing in small caps, which are a big investment opportunity area. Indian stocks are going through a morality test. They are attracting funds only where there is good corporate governance. People who have not invested in good quality stocks have been blown away.My portfolio has quality expensive banks, and I have got HDFC Bank and HDFC. Personally, I would like to buy the basic consumer theme, they have done exceedingly well. The internet theme will kick in at some point of time, it has happened in China. The interesting thing is all e-commerce players are not listed, they are pre-IPOs.I would say the economic policies of the government have improved significantly over the past 12 months. The prospect of investment upturn has improved based on what this government has done. But you have the food security bill which is likely to put pressure on fiscal deficit. It’s a negative from the fiscal point of view. The government has been reducing subsidies. But, the best thing for India will be to abolish all the energy subsides.