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With five states going to the polls after the Budget session, Vivek Mahajan, head-research, Aditya Birla Money, tells Business Standard that we may expect a populist Budget.

And, there could be a possible rollback of the economic stimulus package. Edited excerpts:

What factors led to a continued correction in the markets? Is the worst behind us and is there a shift in foreign institutional investors' outlook towards destination India?

High inflation and governance issues have raised concerns on growth getting hampered. An outflow of $1.6 billion has led to this steep fall.

Change in FIIs' outlook is evident from the fact that the developed markets have been back to growth trajectory leading to diversion of FII funds towards developed markets and emerging markets dependent on exports.

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Unfortunately, we don't have strong domestic institutions to counter the flows. While the developed markets are up five per cent during the year, India is down over 15 per cent year-to-date thereby underperforming by 20 per cent. Last year's gains are more or less wiped out.

We are trading at under 15 times one year forward earnings, which is below the long-term average. Some degree of buying by long-term funds should start.

With inflation and rising input costs what impact do you see on India Inc's fourth-quarter performance?

The impact of inflation and rising input cost would be felt by FMCG, manufacturing sector, among others. However, impact on IT is expected to be minimal though it could feel the impact of rising wage pressure.

Further, companies like Tata Motors, Tata Steel, Bharti Airtel, Tata Chemicals have global exposures through their subsidiaries and, hence, domestic pressures will impact lesser. So, at the Sensex level, the impact of the headwinds is expected to be muted.

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Your expectations from the upcoming Union Budget?

The relevance of the Budget is reducing by the year. However, with nearly five states going to the polls after the Budget, we may expect a populist Budget.

Subsidies will remain high. Moreover, there could be a possible rollback of the economic stimulus package. Thus, the impact of the Budget is likely to be neutral to marginally negative.

Any advice to investors?

It is an ideal time for investors with a long-term perspective to build and restructure the portfolio. Use volatility to accumulate fundamentally sound stories with good corporate governance.

What are the sectors and the stocks where you see investment opportunities?

Export oriented industries are likely to do well in next few quarters. Investors should slowly get back to domestic stories like auto, banking and infrastructure in second half as headwinds start receding and withdrawal of stimulus in the western markets gets under way.

The real estate sector, which has seen massive erosion in value, should be avoided.