Terming the Indian equity market as the most expensive among the emerging markets, DSP Merrill Lynch (DSP ML) downgraded its rating on India and recommended investors to 'sell-into-strength' in equities for the short term."India may well be the greatest long-term story within the emerging markets, but capital inflows are abating, an inflection point in the inflation is imminent and equities are overvalued," DSP said in its report on global emerging markets."Recent weakness in the rupee is a signal of abating capital inflows into the country. The capital inflows have been a key driver of more than 20% year-to-date total return from India," the report added.The report quoted Indian economist Rajeev Varma's prediction of a rise in the inflation based on the wholesale price index to 6% in the next six months, adding that short-term interest rates are likely to go up by 75 basis points over the said period."Our mid-year bullishness on India was predicted on lower inflation - keeping rates low and liquidity high. As inflation trends higher instead of declining in the coming months, the liquidity story reverses," the report added.Quoting Indian strategist Jyoti Jaipuria's estimate of fair value of the market around 12 times earnings, the report said India is the most expensive market within global emerging markets, and added that higher interest rates and slower earnings growth hint at a period of underperformance.
