Bad times continue for the Indian markets in 2011. After a distressing start to the year, the last week of January saw further bloodbath on the street. The Indian markets fell by 3.2% during the week. In all, the total decline for the BSE-Sensex for this year now stands at 10%. In all, the Sensex has lost over 2,110 points in the first during the first nineteen days of this year. This is around 70% of the gains it had recorded in the whole of 2010!
One reason for such a sharp sell-off in stock prices in India has been the persistent outflow of foreign funds. FIIs have pulled out a total of Rs 42 bn from Indian stocks in this year so far. The fear among investors is largely centered on rising inflation, and subsequently higher interest rates. The RBI recently raised interest rates in the review of its monetary policy for 2010-11. Now there is fear that rates are likely to rise even further, if inflation were to remain high.
The interesting part is that while inflation and interest rates are on a high, the other side of the coin – economic growth - is showing signs of stuttering. This was made clear by the industrial growth numbers that were released a couple of weeks earlier. These showed that India’s industrial growth stood at just 2.7% in November 2010, as compared to 10.8% in October.
This is like a catch-22 situation for India's central bank, the RBI. It's getting difficult for it to manage rising inflation and economic growth.
So there are immense concerns that the Indian economy faces as of now. Investors would do well to accept this reality and factor the same into their investment decisions.
We do not see the current stock market correction to get over anytime soon given these near term economic concerns. But if this (correction) were to persist for some more time, it will bring down stock prices to cheaper valuations. And that would provide a good entry point to investors who have been waiting on the sidelines.