Capital markets across the globe reacted panic stricken post US Fed’s announcement on QE withdrawal. Looks like market completely failed to take cognizance of the second half of Mr.Bernanke’s statement ie
‘fed’s action would depend on an improvement in the job scenario and economic recovery’
Indian stock indices corrected their biggest single day loss in 21 months and the rupee fell to a new historic low of Rs 60. As I write this, rupee has bounced back by 30 – 40 paise & Nifty up by 11 points. Slide in the rupee would adversely impact firms with foreign borrowings, especially those who import raw materials like automobile, capital goods, petroleum, power & telecom companies. I don’t foresee RBI to actively intervene in the FX market as it may not want to subsidise the exit of foreign investors.
The primary reason for the FIIs to pull out is they have been losing money in dollar terms both in the stock and Bond market. However, developed economies like US, Japan & Euro are not offering value as much as emerging markets. Lots of these funds will re trace India once the currency stabilizes. Our valuations are attractive and the economy is in the early stages of recovery.
Definitely, this is not the time to panic. Investors should stay put in equities and incrementally take the SIP route in diversified equity funds to take advantage of the current volatility. Since different asset classes behave differently due to domestic and global factors, it is indispensable to follow a disciplined asset allocation approach and not go overboard on any asset class. Equally important is to periodically re view and re balance the asset allocation mix recommended for you.