Let's start with the good news. The Indian party is definitely not over. The economy's long-term growth prospects remain positive and serious investors continue to view India with a considerable degree of bullishness. But the bulls, who took the BSE Sensex into the stratosphere, seemingly oblivious to the pull of gravity, may now find the basic laws of physics more difficult to defy. Result: the stock market party may not regain its verve for sometime to come.

The question on every lip, then, is: have the bears taken over the market? To answer that question, we need to dig deeper into the causes behind the current weakness. The 25 per cent fall in the Sensex was triggered mainly by across the board selling by foreign institutional investors (FIIs). In the last 22 trading sessions, the index has seen its market capitalisation erode by 24 per cent; the index itself has lost nearly 3,200 points from its all-time high of 12,671.11 on May 11, 2006 to its June 12 close of 9,476.15. Put differently, it has wiped out all its 2006 gains and is now ruling at the levels it began the year on.

"Investors (mainly FIIs) have cashed out of equities; this was the real cause of the crash," says Ajay Bagga, CEO, Lotus India AMC, who feels that the weak sentiment in the equity market is prompting nervous domestic players to continue selling despite the fact that FIIs have turned net buyers again. In June, they were net buyers of Rs 1,157 crore worth of stocks in the cash market, compared to an outflow of Rs 1,110 crore from mutual funds.

In an ominous portend, Morgan Stanley has come out with a report which says the downslide across stock markets worldwide may not just be another (long overdue) correction, but the first indication that the global liquidity bubble may be bursting. Morgan Stanley economist Andy Xie feels the US Federal Reserve's decision to increase interest rates will encourage other central banks to do likewise, leading to a worldwide tightening of money supply.

Meanwhile, as many as 237 stocks (out of 770) in the large-cap and mid-cap space are quoting at 52-week lows, but there are few buyers even at these levels. Fund and portfolio managers admit that most valuations are again looking attractive but remain tightlipped about committing large sums on equities. They explain that the Sensex, at 12,000-plus, was extremely expensive, and that the crash was really a much awaited and welcome correction. They add that the market is in an oversold zone, so it's just a matter of time before it bounces back, given the sound fundamentals of the Indian economy and the general health of the country's corporate sector. But they're still not ready to back their instincts with cash. Why? China has had four successive years of steroid-charged GDP growth, but its equity market has remained flat. Their fear: the Indian elephant might follow the Dragon's example. "The fall in the Sensex has been sharper than expected. I feel it will consolidate at current (9,000-9,500) levels due to lack of confidence among investors. It is likely to move in a narrow band, but I think it will bounce back and end 2006 above 11,000," says Devesh Kumar, Head (Equities), ICICI Securities. Bagga adds that this is probably the best time to invest as most stocks are trading at levels they recorded a year back. "Be greedy when others are fearful and be fearful when others are greedy," is his advice for investors.

But domestic players are more concerned about cashing out with some of the appreciation they had booked during the bull run. Result: more selling pressure. "Everyone is offloading positions even at lower levels," says Arun Kejrewal, Director, KRIS, a research and investment outfit. Given such compulsions, the bearish mood is likely to persist for sometime.

INSTAN TIP
The fortnight's burning question.

The BSE Sensex has been yo-yoing hundreds of points everyday even as it has lost about 3,000 points in a fortnight. Will it crash even more before stabilising?

No. Motilal Oswal, CMD, Motilal Oswal Securities

My sense is that the market has more or less bottomed out at the current (9,000-9,500) levels. Investors will be well advised to selectively buy very good quality stock for medium-to long-term gains.

Maybe. Pankaj Razdan, MD, Prudential ICICI AMC

It is difficult to predict where the market is headed in the short term. However, based on the strong fundamentals of the Indian economy, we are bullish on the long-term prospects of equity markets and recommend that investors use every drop, such as this one, to buy shares at lower levels.

No. Narayan S.A., MD, Kotak Securities

We are somewhere there (near the bottom of the cycle). I can't see the Sensex going below 8,700-9,000 levels.

-Compiled by Shivani Lath

Q&A
"Mass Market Is A Focus Area"

HSBC is now targeting consumers who earn Rs 3,500-10,000 a month. This is in stark contrast to its image as a true-blue multinational bank which deals only with creamy layer of society. Nicolas G. Winsor, Head, Personal Financial Services, HSBC India, spoke to BT's Shivani Lath about this new strategy. Excerpts:

Why is HSBC suddenly focusing on the mass market in India?

The emerging middle class is large (estimated at 31 million households) and growing. But the credit requirements of this group tend to be met through informal sources. We saw an opportunity to leverage our global expertise in consumer finance to address a market need. Our strategy is to help these individuals to get credit through small-value loans.

How many customers do you have in this segment?

This is still a relatively new business, but we have received over 100,000 loan requests since we opened less than a year ago. This gives you an idea of the unfulfilled demand for consumer credit in this market.

What is the potential of this market?

Consumer lending is estimated at 5-6 per cent of GDP in India, compared to around 30 per cent in developed economies. With changing borrowing and consumption patterns in India, we forecast considerable growth in the years ahead.