Equity markets do not like uncertainty, but unfortunately India has entered an uncertain economic/political phase with the announcement of General elections. Global situation is already in a downturn to offer any succour. The US and many European indices have already broken their support levels and are headed much lower. And this does not offer much hope to Indian equity markets for at least the next 3 months. This is the reason why positive developments like falling inflation and reduction in interest rates is not lending support to the markets.
The market will be focusing on the news emanating from the political front, and any negative use, the chances of which are fairly high, could cause panic sell off in the markets. The ballooning fiscal deficit is putting immense pressure on the Rupee leading to a massive sell off by the FII's. Domestic institutions and Mutual funds are happy sitting on a pile of cash. That is precisely what retail investors ought to do, and wait for the panic to set in. There is every likelihood that the markets will make new panic lows between March to May 2009, and that will be the time for long term investors to enter the markets.
The uncertain environment is likely to end with the installation of the new Govt. at Delhi. Falling inflation and reduced interest rates will definitely show in the profitability of corporates from Q2 of the next fiscal. Thus, any downturn in the markets will give an attractive opportunity for investment, as the risk reward ratio will turn extremely attractive at lower levels.
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