Red Rag And The Matador

• Sensex can cross the 25000-30000 levels in the next nine months; global crises like subprime are considered too small to affect emerging markets.
  
• Economic fundamentals are still strong and global liquidity intact; there is no reason for the bullish phase to be over although there will be corrections.
  
• RBI and finance ministry have managed to cool down the heated economy; policymakers have guided the economy to ensure robust growth.
  
• Early mid-term general elections can derail policies, affect the growth story; high interest rates may affect several sectors like housing, cement and steel.

***

On a similar plane, if domestic interest rates do not come down, it will affect the overall profitability of several sectors like housing and automobiles. This will—as it has happened in the past few months—become a drag on GDP growth. If the trend continues, it may provide an excuse to foreign investors to pull out money from Indian equities. Kotak feels that the Reserve Bank of India is likely to exercise 'caution' on interest rates as the central bank is also concerned about inflation in an election year.

There are doubts being expressed about India's housing and infrastructure sectors. In the case of housing, prices have come down by 20-30 per cent in small cities and towns. Even in the bigger cities, prices of new constructions are under pressure. Many experts are convinced that real estate valuations have become challenging in the recent past and the chances of a major correction have increased. If it happens, it will have a multiplier effect on other sectors like construction, steel and cement.

More importantly, the finance ministry and the rbi are concerned about the heating up of the economy. So, there have been attempts—through hikes in interest rates and sucking out excess liquidity—to cool it down. This is clearly reflected in the lower industrial production growth figures in the past few months. With elections round the corner, the policymakers will continue with such decisions to check price rise. This too can ensure that India doesn't remain the flavour of the month among investors.

So, which way will the Sensex move over the next few months? It depends on which voices you wish to hear—the bulls or bears. It also depends on your belief in the economic fundamentals—positive or bleak. It depends on who you think will form the next government—UPA, NDA, or a third front. As I told a friend of mine, "It depends on whether it will rain the next week or not. If it does, the Sensex can touch 18000. If it doesn't, it may hover around 17000. But, at the moment, there is no reason for a correction, or for the index to come down to 16000."