Short-term spikes in store, but markets not bottomed out

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FIIs sell shares worth Rs 910 cr

When contacted by FE last week, investment guru Marc Faber clearly mentioned that he would wait before investing in India and he saw the Sensex touching 10,000 levels. With the steep fall happening on Monday, those levels look perilously close.

The majority sentiment in the market is strongly bearish, especially in the short-term. The number of players who say that the market is yet to bottom out have gone up substantially. The fear psychosis that existed in the global markets has now finally spread to India as well. “There is a high level of risk aversion and fear in the markets and therefore the markets will correct further. I see another 2,000 points correction from these levels,” says Raamdeo Agarwal, co-promoter of Motilal Oswal Securities.

Even the move to remove restrictions on the foreign institutional investors issuing overseas derivative instruments would bring in short-term relief but not long-term succour. Amitabh Chakraborty president (equity), Religare Securities reckons, “A short term spike of 10 to 15% in Sensex can't be ruled out."

Many of the foreign institutional investors (FIIs) have already unwound their positions after the October 2007 ruling came across. Chakraborty adds, “Majority of the FIIs are way below the 40% limit today, and hence sufficient headroom already exists for FII investment through the participatory note (PN) route today, in our opinion.” Speaking about the market bottoming out, he mentions, “We are seeing the market bottoming out at about 9,000-10,000, given our Sensex earnings estimates of 10-12% in FY09 and historically market had bottomed out at about 9-10x forward earnings.”

Speaking from Singapore, Samir Arora, who oversees $1 billion at Helios Capital Management said, “This move will not make much of a difference in the short run.” He added, “When things settle down and the sentiment reverses, the gates have been opened for them to come back in.”

Even the move by the Reserve Bank of India (RBI) to reduce the cash reserve ratio (CRR) by 50 basis points, which is likely to infuse Rs 20,000 crore in the system, is expected to have a temporary impact. Bank stocks, that have been pounded severely, are expected to revive and the market sentiment would remain cheerful, although for a short while reckon experts. “The move came in slightly late and the damage has been done,” says Devendra Nevgi, CEO Quantum Asset Management.