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On Saturday, we got the shocking news that Reserve Bank of India (RBI) governor Raghuram Rajan would not be serving another term. While the markets didn't react negatively to the news of 'Rexit' yesterday, there are several factors that may cause a bumpy ride for the Indian markets in the near term.
To start we have the 'Brexit' looming ahead midweek. If Britain vote to leave the European Union on 23rd June 2016, one can expect increased volatility in the global financial markets, India included. UK PM David Cameron has already warned of a "probable recession" if the UK votes on leaving the EU. The volatility may also force a safe-haven flight to the dollar assets and weigh on the rupee which is already facing selling pressure.
Going further, all eyes are on the outcome of a meeting that will spell government's decision on relaxing Foreign Direct Investment (FDI) norms. The Prime Minister's Office has convened a meeting on June 21 to deliberate upon a roadmap for further easing FDI norms. Market participants are tracking this event as it will open up avenues in many sectors for which the government is planning to relax FDI norms.
Then we have the monsoons. As per CMIE Economic Outlook, India reported 25% lower than the long period average (LPA) rainfall at 46.2 mm from 1 June to 15 June. This is in contrast with Indian Meteorological Department's earlier forecasts of above average rainfall. Since rains impact rural incomes and spending, how the monsoon rains pan out will be another key factor to monitor.
Further, there are concerns regarding food inflation. Prices of staple food items such as tomatoes, potatoes and pulses have gone up sharply because of supply shortage caused by excessive heat this summer and insufficient rains in 2015.
So, these are some of a factors that need to be monitored in the near term. We don't know what the outcomes will be, or how the markets will react to these macroeconomic events. We might as well flip a coin and decide the effect of how markets will move in the short run.
So how can one counter this volatility and keep odds in one's favour? We believe that rather than being afraid of the volatility, you can benefit from it. And this can be done investing for the long term.
This is because as your time horizon increases, the volatility of your returns diminishes.
Buy good quality businesses on dips and exit if stocks run up beyond what fundamentals can justify. Remember - Your net worth is not what Mr Market will pay you today, but rather the intrinsic value of the stocks you own based on the fundamentals of the underlying businesses.
For information on how to pick stocks that have the potential to deliver big returns, download our special report now!