Indian markets are expected to stay volatile this week following a further sell-off by foreign investors unless the differences between the ruling Congress and its Left allies over the Indo-US civil nuclear deal are reconciled and the US credit markets remain stable.
Till Saturday morning, most market players expected a sharp rebound this week on the lifeline extended by the Federal Reserve, whose surprise move to slash discount rates to banks lifted the Dow and the Nasdaq by nearly 2 per cent on Friday.
But by evening, the mood turned edgy again, with the growing feeling that the government is living on borrowed time following the Communist Party of India (Marxist) Politburo hardening its stand on the Indo-US nuclear deal.
"It is becoming a serious risk factor. But the market is mature and reacts only when some concrete development happens," said Kamlesh Kotak, head, equity research, Asian Markets Securities.
The market is also likely to be impacted by the unwinding of the yen carry trade as a result of the appreciation of the Japanese yen from 120 to 112 a dollar over the past two weeks.
The yen carry trade refers to the practice of borrowing at low interest rates in the yen and using the loan to buy higher-yielding assets elsewhere.
Global investors have been borrowing from the Japanese market to take advantage of the low interest rates (0.5 per cent) to buy high-return assets in other markets, including India.
But the credit shortage fears in equities markets, following the sub-prime mortgage turmoil in the US, triggered unwinding of the yen carry trade.
Most markets across Asia saw big sell-offs by foreign funds, wiping off recent gains in these markets. India saw near $3 billion worth net sales by foreign institutional investors in the markets this month - their biggest single-month net sale ever.
As a result, the Sensex has shed nearly 11 per cent, or 1,727.33 points, from its high of 15,868.85 (on July 24). Experts said the fall was not severe due to big buying by local institutions, which were net buyers for Rs 5,956.82 crore (about $1.5 billion) this month.
Expectedly, most market experts are unwilling to make short-term predictions. Sumeet Rohra, analyst with Tricolour India Advisory, a foreign fund, said "We feel the worst is behind us since Indian markets have already bottomed out. The market has seen significant correction so far. This, along with strong corporate numbers, will push the market to new highs by the end of the calendar year."
He said the GDP growth of 8.5 to 9 per cent and strong corporate expectations justified the premium at which Indian markets were trading.
