FIIs Exit + Is Market OverSold ? Can One BUY Now ?

The market had its 3rd largest 1 day fall in 4 years falling 4% as the Government is Severely Paralyzed. Is the Indian Market Oversold ? Technical indicators including RSI, 200 DMA are getting close to but are not yet at over-sold levels. Fund manager survey indicate sentiment on India is at a lower end of last 12 month trend but not yet at extreme bearishness levels.

The single biggest factor making investors nervous on India is the currency [Well, impossible to stabilize if FII Withdraw at the rate they have done in June & July $10 Bn or Rs 60,000 Cr from Debt & Equity]. A stabilization of the currency would make us as well as investors more positive on India. While the Govt has taken a series of steps to stabilize the currency [In reality It has Hurt More], it has not worked partly due to nervousness on the Fed tapering. Even after the start of these measures, India is the 3rd worst performing currency amongst EMs.

Based on past history, the markets give an average return of near 11% over 3 months once currency stabilizes. Given the negative sentiment in India currently, we see a possibility of something similar this time too. An increase in fx reserves by raising fx bonds accompanied by low trade deficit data could help stabilize the currency over next few weeks.

FII Holding in India is still a high at 24% of the Total Market Cap of BSE 200 [It was 27% Pre- Crash in 2008 and 20% Post-Crash in 2009]. So far India has not seen large-scale selling done by the FIIs compared to the inflows of last few years.

Analysis of past major falls indicates a mixed trend. Only in 54% of the instances have markets given a positive return over next 1 month. So it is better to wait for a further correction or some signs of stability in the currency before buying India.

So What do Investors Do ?
Accumulate in SMALL bits & pieces companies that can continue to grow their profits on a YoY basis and stick to Large Cap Stocks Only. Or keep BUYING in Diversified Equity Funds [Systematic Investment Plans]. If already the Failed Government makes more Policy mistake it could result in accelerated selling by the FIIs which could bring down the markets rapidly. Also be Prepared to Hold for 3 Years if we have a fractured mandate in Dec-2013 or April 2014 Elections.