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Sensex and the future of the Indian markets

After the 600 pt drop yesterday a lot of people are wondering what will happen to the Indian equity markets. In one of my previous blogs I had mentioned that this year it seems that the Sensex is going to oscillate between 11500 and 14500. That was before the RBI hiked the CRR and repo rates. With this in view, the future does not look all that bright right now. With a squeeze on liquidity and other inflation-fighting measures taken up the government, it is just a question of time when the growth of the economy slows down. Add to it back-door price controls being brought back in cement, steel and pharma (3 very very important sectors for the market), and the short term future for the equity market does not look good at all.

Although the market may have some 100-200 point relief rallies from time to time, my personal feeling is that we are over with the bull market for now. This phase of correction (or bear market) may be deeper and last longer than most people are anticipating at this moment. This looks a lot like the 1994-1995 top that the market had when inflation control measures practically put a dead stop to the bull market. We may be looking at a 1-2 year consolidation at these levels before the market decides to move forward. Another cause of concern is that the retail participation (read small investors) have been missing since the 2006 May carnage and have not returned till now. With the market correcting in the way it is, it seems unlikely that people will keen on pumping in their money unless they see a turn in sentiment. Buying may only come back at a much,much lower level from here.

I will stick out and say that the Sensex may be headed towards 9000~10000 if it goes below 12,000. This is unless the government stops meddling in the free market economy after the crucial UP elections and monsoons. Our WPI and CPI is heading higher mainly because of supply constraints and the government is only taking short-term measures to stem the demand. So, the problem of demand-supply mismatch is going to remain and the inflation will tend to be high in the medium to long term.

So, what should you do? There are a few options you can think of:

1. Sell your stocks and invest in fixed deposits/PPF/Gold etc
2. Invest in your favourite stocks on a periodic basis (monthly SIP) so that you accumulate them at a relatively low price over a period of time.

Which of these (or a mix of both) should you take would depend on your risk appetite.

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