Bad times continue for the Indian markets in 2011. After a distressing start to the year, the first week of February saw further bloodbath on the street. The Indian markets fell by 2.1% during the week. In all, the total decline for the BSE-Sensex for this year now stands at around 12%. In all, the Sensex has lost over 2,500 points during the first twenty four trading days of this year. This is around 82% of the gains it had recorded in the whole of 2010!
So what's causing the fear to keep its head high? We believe the fear 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. In fact, as per latest data, India's food inflation has risen further to 17%.
Last week saw even the Prime Minister Dr. Manmohan Singh raising his voice against the inflation fears. Singh has termed inflation as a serious threat to India's growth. And why not? While rising prices are concern on one hand, the economy might feel the pinch of subsequently rising interest going forward.
In short, 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.
As for the stock markets, while valuations have dropped across the board, we do not see the current stock market correction to get over anytime soon. The bright spot however is that if this correction were to persist for some more time, it will bring down stock prices to even cheaper valuations. And that would provide a good entry point to investors who have been waiting on the sidelines.