The 400-points free fall of the BSE Sensex and 124 points decline of NSE Nifty on Thursday on reports that the US Federal Reserve may start trimming its bond buying programme has brought the question of how long the Indian market would remain prisoner to US Fed’s stimulus decision into focus again.

This is important because the FIIs have infused life into the Indian markets in recent years and with domestic investors keeping off, any exodus by foreign investors may leave the market gasping, more so because of weak economy and high interest rates.

It was the second time since June that fears over tapering of the US Fed’s bond buying programme had spooked the markets. When the Fed Chairman Ben Bernanke in mid-June hinted at a gradual phasing out of the stimulus package, the Sensex crashed by 526 points. Yesterday, the Sensex fell by over 400 points. It is true the Sensex has recovered by about 1,500 points since the last crash. But the rupee has weakened by about 5 per cent against the US currency during this period.

Little respite

Dinesh Thakkar, Chairman & Managing Director, Angel Broking, Mumbai, putting the US taper issue in perspective, said: “All emerging markets including India would be influenced by the Fed action” since portfolio flows were an “important determinant” of market direction in the near term. He said there was little respite from global developments in an integrated world. Though issues might continue to change “interconnectedness stays”.

The fund flows induce a “churn in the market establishing better performing sectors and stocks as clear favourites”, attracting “disproportionate FII interest over the medium term”.

On the impact of US taper when it happens, he said FIIs had exited from emerging markets in the past. It was for investors to analyse the investment environment and the opportunities for growth. His view was that “as long as they are intact, all kinds of investors- FIIs and domestic- will eventually come back”.

No absolute protection strategies

Thakkar said while “there are no absolute protection strategies” against corrections, “buying good stocks is a better solution than staying away from the market”. His suggestion to investors was to buy stocks with strong fundamentals that promise positive outcomes over the next two years and which are relatively undervalued. Even if these stocks correct, they would limit the loss and bounce back faster.

He expected FII selling to be based on issues such as macro problems of India, US dollar appreciation and weakening INR. But the currency weakening would have a positive bearing on the export sector since the more FIIs sell, the more INR would depreciate, which was good for exporters. But he cautioned that “FII owned stocks in interest rate sensitive sectors would be more vulnerable”, both from a supply point of view and changed perception of the economy.

However, he did not expect the pace of selling by DIIs to gather further pace. DIIs had to sell to meet redemption pressures. In the last 3 years, MFs and insurance schemes had seen weak inflows and constant redemptions have led to weak hands going out of the market. Now, he said, “there isn’t enough participation among retail investors to trigger panic selling”.

Referring to the steps the government should take to make Indian investors get interested in equity, Thakkar said: “if inflation is reined in and the growth picks up in the economy, investors would again flock to the equity market”. While high inflation has singed them, the stocks they own, mostly from the infrastructure sector, have shed huge value.

Market volatility

On whether market volatility would remain till the Lok Sabha polls, the Angel Broking CMD said volatility due to domestic reasons was “unlikely” as the markets could sense them ahead of the polls. But “there might be more volatility in the run up to the Fed tapering” and once it was known, “the market will quickly reset its expectations”. Hence, he cautioned the investors to “avoid the temptation” to wait till elections results were declared.

On liquidity, rather than strong fundamentals, remaining a key driver of Indian markets, Thakkar said markets “do converge on fundamentals” over a period but “it would be great if India can get its act together while the liquidity party is on”.

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