If we needed evidence that the world is a small place, we have it now. The volatility in the US credit markets is now impacting markets across the world. India is no exception, with the benchmark Sensex down around 30 per cent from its January 10 high. Among other indices, the worst hit was the Small Cap Index, which is down by about 37 per cent.
There are two major factors responsible for this. One, the sharp selling by FIIs and, two, the premium at which Indian markets were trading till early January.
In 2007, FIIs bought shares worth $17 billion (Rs 71,486 crore). Till March 17 2008, FIIs had sold shares worth $3.2 billion (Rs 13,193 crore), which contributed in pulling the Sensex below the 15,000-mark, down from the 21,000-levels in early January.
Valuation fear is out of the question now, as Indian markets are currently trading at 14.5-15 times FY09 earnings, compared to 20-plus times early this year. On a trailing basis, the Sensex was at around 27 times earnings in January, which has come to 19 times.
These positive valuations are, however, not attracting investors, mostly because of the fear that FIIs are selling to make up for their losses in the global credit markets. So, every short-term rally is being used to exit.
It seems unlikely that markets will rebound in the short-to-medium term. The trends will continue to be weak till US credit markets start recovering.
Text: Rajesh Kumar
Image: Finance Minister P Chidambaram inspects the statue of the bronze bull outside the Bombay Stock Exchange | Photograph: Indranil Mukherjee/AFP/Getty Images
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