Just over two weeks ago, Mumbai's stock market was looking unstoppable as it moved by leaps and bounds to new record highs. But now investors are licking their wounds after a brutal correction that has pulled the benchmark Sensex index down by 14 percent since May 10 amid concerns about rising world interest rates, plunging metal prices and surging fuel prices.
While all Asian stock markets have been caught up in the world-wide turmoil triggered by a decision by the US Federal Reserve to hike interest rates, India's stock market was been particularly badly hit.
Analysts now say the Indian markets bull run has been stopped in its tracks and that the days of spectacular returns could for the time being be at an end.
The Sensex (the 30 largest and most actively traded stocks on the Bombay Stock Exchange) gained 43 percent last year and had risen 34 percent since January 1 before this months descent.
"The big gains are over. Valuations got ahead of fundamentals," said R. Balakrishnan, director of Bombay investment advisory firm Parellex Consulting Services.
"We're going to see a lot of volatility - a couple of days of sunshine followed by a couple of days of depression - but basically the market is going to stagnate," he added.
Analysts said that the "India story," one of a strong economy and a burgeoning middle class market which had inspired the market gains was still on track, with the economy still expected to grow by seven-to- eight percent this year.
But corporate earnings growth will not be as impressive as it has been in the past 18 months, analysts said. "Valuations (still) appear stretched at this stage," said Hiten Mehta, director at Fortune Financial Services Ltd in Bombay. "A healthier market would emerge with the Sensex below the 10,000 point level."
The Sensex, whose meteoric rise had been a highlight of the countrys economic success story, hit a record high of 12,612.38 points on May 10, four times its value three years ago.
It closed Friday at 10,809.4 after rallying by 143 points. But traders were unimpressed, saying it had come in thin trade which always exacerbates market movements.
"The market has recovered on low volumes. This indicates the shallowness (of the market) and the lack of investor appetite," said Jamnadas Morarjee, a dealer at Bombay brokerage.
Dealers say the market is being propped up by state-run mutual funds and institutions.
Foreign funds, which had been responsible for the Sensex's record highs, sold more than two billion dollars worth of shares in the past 10 trading days and dealers said they were likely to remain on the sidelines until a clearer picture emerged. "The buying momentum has gone out of the market. Fundamentally the money is not going back," said Salil Sharma, partner at New Delhi brokerage Kapur Sharma.
"Overseas funds are (still) speaking in positive tones but have not bought actively," said the brokerage Jamnadas Morarjee dealer who did not wish to be named.
In 2005, overseas funds invested 10.7 billion dollars and the trend was continuing until this months downturn. The rupee too has been hit hard due to heavy sales by foreign funds. The Indian currency was quoted at a five-month low of 45.8 rupees to the dollar Friday as foreign funds sold Indian shares and repatriated profits.
Finance Minister P. Chidambaram has urged investors to keep their money in stocks saying the country's fundamentals are strong with the economy estimated to have expanded by 8.1 percent in the fiscal year ended March.
"India has a well-regulated equity market and the growth story remains intact," Chidambaram said last week. "Long-term investors must stay invested. There is no reason for any panic."
The government is hoping that robust industrial and agriculture expansion could push the economy to grow by as much as 10 percent annually within the next few years.
The Sensex is still up a respectable 15 percent for the year and dealers say that weaker players have been squeezed out of the market by the downturn, putting it on a more solid footing.
But Balakrishnan says he is not betting on the Sensex making any major gains from here.
"I see the Sensex maybe ending the year up five percent or down five percent from this level," he said. "We have to wait for the fundamentals to catch up with the market."
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