Investors should hope for the best but would do well to prepare for more stock market volatility.
The downward trend of Indian stock market has become the matter of concern not only for the investors but for the country’s economy as a whole. Over the past seven successive sessions, investors have become poorer by approximately ~10 lakh crore, with ~2.7 lakh crore of wealth being wiped out in Tuesday’s trade alone. This ongoing carnage at Dalal Street holds investment lessons for one and all. Despite the Government’s persistent cautionary advice and factoring in the possibility that the market going south is a temporary phenomenon, investors need to be extra cautious in their both their trading attitude and appetite. The root causes for the equity market’s volatility are a confluence of factors, primary among which is valuation discomfort. Global cues too have been discouraging. Investors need to be circumspect, however, because even after this fall – the 30-share Sensex has plunged over 2,000 points since the presentation of the Union Budget on February 1 – markets are higher than where they were a month ago.
Dalal Street also faced the hit after other Asian indices closed in the red, tracking record-breaking losses at the Wall Street over the past couple of days. As a result, both domestic as well as foreign investor sentiment was hit after the Government announced in the Budget a proposal to levy 10 per cent Long- Term Capital Gains (LTCG) tax on equities and projected a fiscal deficit of 3.5 per cent of GDP for 2017-18. As far as key indicators of volatility are concerned, market insiders believe that the global sell-off due to a spike in global bond yield resulted in a knee-jerk reaction in the domestic market. They, however, foresee an extended impact in the domestic market post the introduction of the LTCG and concerns over managing fiscal deficit. Keeping complete market mayhem at bay, domestic stocks are trying hard to recoup some of the losses incurred by value buying on account of corporate earnings growth expectations.
The RBI’s monetary policy review announced on Wednesday maintained the status quo and kept interest rates unchanged, and this could be a trigger for further volatility on the bourses. If India’s central bank had cut some key rates as per industry expectations, investor sentiment could have helped boost the domes- tic indices though it would have had no impact on global factors. The risks of volatility in domestic the market also depends upon how punters react to the RBI’s commentary on the Government’s fiscal prudency and the rising yield in bond markets with the central bank flagging factors such as the increase in House Rent Allowance and crude oil prices that could cause an upside risk to inflation. Market analysts have repeatedly been calling for prompt and serious action over concerns about several stocks in India, mostly mid and small-cap, being overvalued. In that sense, a correction has probably been long overdue. In the medium to long term, investors are still in wait-and-watch mode, hoping that the markets will stabilize. Let’s hope the bulls are back on track sooner rather than later but as we enter the run-up months to the next General Election, political uncertainty is the last thing Dalal Street needs to lead a sustained bull run.