For investors, there could be no better proof of the compelling need to tread cautiously in the equity markets than the wide swings seen in market movements between Thursday and Friday.
On Thursday, a market that is currently seen as fragile on sentiments, first rallied by 684 points (the BSE Sensex rally) to close at a three year high in the wake of the US Federal Reserve’s decision to not tinker with its bond buying program.
Just 24-hours later, it went on to fall by 1.9 per cent or 383 points (fall in the 30-share Sensex) on Friday, after Raghuram Rajan surprised the market and raised the repo rate (at which RBI lends to commercial banks) by 25 basis points, primarily with a view to bring inflation down to tolerable levels.
The takeaway from the over-the-top market behaviour in the last two trading days — do not get excited by a sharp rally in the markets while not losing your heart and exit when it goes down. Investors should on the other hand follow the opposite, accumulate further when it falls and use the opportunity when it rises to book some profits.
The uncertainty in the market is unprecedented and investors need to look at staying safe with debt — both short term and long term fixed income instruments or fixed maturity plans — and wait for the tide to settle down before venturing into equities.
India and the global economy
When it comes to the macroeconomic situation, both in India and the global economy, the outlook continues to be fragile. Since the RBI’s first quarter review in July, a weak recovery has been taking hold in advanced economies, with growth picking up in Japan and the UK and the euro area exiting recession.
However, activity has slowed in several emerging economies, buffeted by heightened financial market turbulence on the prospect of tapering of quantitative easing in the US. The decision by the US Federal Reserve to hold off tapering has buoyed financial markets but tapering is inevitable.
On the domestic front, growth has weakened with continuing sluggishness in industrial activity and services. The pace of infrastructure project completion is subdued and new project starts remain muted.
Consumption, while relatively firm so far, is starting to weaken even in rural areas, with durable goods consumption hit hard. Consequently, growth is trailing below potential and the output gap is widening. Some pick-up is expected on