Correction is a good sign and healthy for the Indian equity market. But the biggest reason for the fall in the stock market is the slowdown in foreign flows over the past few days. FII funds are the lifeline of the Indian market. If foreign investors continue to pump in money into Indian equities, the market will keep on surging irrespective of events and news. So far, in the past three months FIIs have invested nearly US $5.9 billion, of which US $1.9 billion came in March.
FII flows will continue if Indian economy can record robust growth rates. Indeed, global investors are eyeing opportunities in two markets - India and the US. In fact, India has received the highest foreign fund inflows among the emerging markets in the past year.
While foreign investors are positive on the Indian economy, the government also needs to push ahead with key reforms.
Untimely rains damaging crops in north and west India is also weighing on the market sentiment. There are concerns that it will put pressure on food prices, restricting the Reserve Bank of India (RBI) from cutting rates. Meanwhile, the next trigger for the market will be the March 2015 ending corporate results, which would be unveiled from the second week of April.
Indian fund managers are sitting on the sidelines given the overstretched valuations of stocks. Some mutual funds are sitting on cash levels of up to 30 per cent. Clearly, there is no euphoria in the Indian equity market yet. Indeed, insurance companies - facing redemption pressures - and retail investors are staying away from the market while private equity players are struggling to make exits with decent returns.
While everyone is positive on India in the long-term, there may be pain in the short-term. In this scenario, investors and traders should be careful in picking stocks. Any correction may give an opportunity to build a good portfolio and investors should take a long-term view. Mid-caps give better returns than large-caps. But investors should use the mutual fund route to invest in mid-cap stocks. Direct investment should be in the frontline blue-chip stocks with sound fundamentals.
This week, the Indian market will keep a close eye on the developments in Yemen. On Monday and Tuesday, the Indian market may see some amount of net asset value (NAV) propping ahead of the year-end. It is a truncated week. The Indian market is closed on Thursday and Friday on account of Mahavir Jayanti and Good Friday, respectively. Markets will also keep a close eye on Europe. On Monday, the Greek government may submit a comprehensive list of proposed reforms in order to secure more bailout funds.
On Tuesday, the government will unveil its eight core infrastructure industries data for February 2015. The same day the government will also declare its fiscal deficit data. On Thursday, HSBC India Manufacturing Purchasing Managers' Index (PMI) will be announced for March 2015.