There is a need for more evolved view on Indian markets

Last week, while seeking to explain the Sensex's fall from 30,000 to 27,000, a leading business newspaper elaborated on why India will undergo more pain in the coming days.

It cited issues on taxing of FIIs, the poor corporate performance of India Inc, slowdown in reform process, and FIIs looking for other emerging markets.

It is quite an irony that a Sensex correction of 10 per cent has got people worried about the future of the Indian equity market.

Most of the negatives like the poor corporate performance have already been discounted by the market. Slowdown in reform process and taxing of FIIs are uncertainties that are currently surrounding the market. These concerns have resulted in the Indian market slowly losing steam.

Meanwhile the government doesn't seem to be learning from its past experience.

Last week's column had appreciated the finance minister's comment that India is not a tax haven and FIIs have to pay. But our worry was that governments have gone back on their words when FIIs have started selling.

Sadly, this time too it isn't looking any different. In the last five days about $1 billion of selling was witnessed in the Indian equity market. And the government is already talking about relaxation in taxing the FIIs.  

FIIs don't mind paying tax, but they want clarity as they don't like to trade in a country that has an uncertain taxation policy.

Concerns surrounding taxation on FII trades on a retrospective basis will continue to hurt market sentiments.

FIIs have been the lifeline of the Indian market, and in the first four months have invested close to $8 billion in the Indian equity market.

But the good news is that even though FIIs may book profits, the market this time round is finding support from Indian mutual funds. The Indian MFs are sitting on a huge inflow of $10 billion that has come in the last one year.

This is the reason why mid-caps have held on strong despite the Sensex's correction.

Yes, the slowdown in the reform process is testing the patience of investors. Inability to pass key bills in the Parliament despite having a majority in the Lok Sabha is not giving positive signals about the government. If the government is not able to quickly put its act together, then it could hurt India.

What is encouraging in this scenario is that India is in a sweet spot and is attracting a lot of attention across the globe.

Among the BRIC nations, China's economy is slowing and its banking sector is in turmoil.

Russia has been hurt by sanctions and drop in oil prices, while Brazil is said to be hit by recession following the crash in commodity prices as well as local political issues.

In such a scenario, India - which has a strong banking system, majority government at the centre, good government finances and balance sheet, low inflation and a steady currency - looks all set to take the advantage of the global flow.

Unlike, India there aren't many emerging markets in the world which have so many favourable factors to attract flows. Though valuations are higher in India, the point is that the higher premium is precisely because of the favourable factors.

As an Indian investor, one may see the equity market losing steam and looking less attractive. But from a global standpoint, India is still attractive given that many economies are struggling for growth.

Last week the US Fed indicated that a hike in rates will take longer than expected. This also augurs well for India.

However, that doesn't mean that one can be complacent about the Indian equity market. We have been maintaining our view for the past few weeks that the current market is not one to experiment but stick to fundamentals.

Waiting on the sidelines might be a better idea than venturing into a market surrounded by uncertainty. It's a stock specific market and any dip should be seen as an opportunity to build a strong portfolio.

Meanwhile, in this week all eyes will be on Parliament, which will debate on Goods and Services Tax (GST).

The market will also look for an indication from the government on taxing of FIIs.

Automobile stocks will be in action after a set of good sales numbers for April 2015.

The market will closely watch results from Hindustan Unilever, Kotak Bank, Grasim Industries, Hero MotoCorp and Punjab National Bank.

Also players will keep an eye on HSBC India Manufacturing PMI and HSBC India Services PMI for April 2015.