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BW Businessworld

Fear Rules!

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Stock markets around the world had a torrid time last week and the Indian ones were no exception. Concerns over a possible sovereign debt default by Greece and belied expectations of a third of quantitative easing (QE3) by the US Federal Reserve Board  sent a wave of negative sentiment through Dalal Street, resulting in across-the-board selling by investors.

In a word, liquidity (mainly from foreign institutional investors, or FIIs) just dried up. There was a massive fall on Thursday and Friday that wiped off 900 points from the Bombay Stock Exchange (BSE) Sensitive Index (Sensex), which ended the week with a loss of 772 points overall, closing at 16,162.06 points. On Thursday, FIIs sold over $251 million worth of stock.

"The volatility in the Indian market is the mirror of what's happening in the global markets," says Puneet Nanda, executive director at ICICI Prudential Life Insurance. "If you ask me when I see the market stabilizing, the answer is I don't know." he's not alone. many others believe the market could fall another 10 or even 15 per cent from here on; no one knows the fate of countries in the Euro-zone.

At least for another few weeks, they say, fear and uncertainty will be the twin swords of Damocles hanging over the markets. Economic recovery in the US holds out no hope of certainty either (which matters because the US is opne-third of the global economy).

Nanda is certain that there is still some pain left in the Indian market. "The next two-three quarters will be tough in terms of corporate performance," he says. There is little doubt that the slowdown will sooner or later impact corporate profitability. The bigger worry is the long-term, as going ahead (about 2 years from now, according to Nanda), when the the capacity bottle-necks will impact the topline or revenues of many companies.
Is there any respite? Perhaps a fall in crude oil prices; they also fell, following the pessimism on the global economic outlook. Brent crude is down $5, trading at around $105 per barrel. Crude oil imports accounts for nearly 55 per cent of total Indian imports.

So don't let the bull to charge this week. Markets will probably remain volatile ahead of the expiry date of futures and options (F&O) contracts at end September. Some short covering may help the market regain some of last week's losses, but overall the Sensex is expected to remain jittery, and take cues from its global counterparts.