Correction phase

The stock markets have been range-bound in the past few weeks, after a sizzling run in December. After the market's superlative performance last year, some amount of profit-taking is only to be expected.

December's unprecedented bull run was an indication of how well the India story has been sold to foreign investors, and the market was driven up mainly by foreign institutional investors scrambling to ensure that their portfolios at the end of the year included a slice of India.

After such exuberance, a reaction is normal. The question is, has anything changed fundamentally in the new year?

It is important to keep in mind that the market rally has been across the board, in all emerging markets.

The rally has been driven by liquidity, the result of loose monetary policy in the developed markets. Despite a few central banks raising interest rates, all that the US Federal Reserve has done so far is to change the wording of its communique.

That little change did lead to a sell-off in stock markets across the world, but the markets have since stabilised. There are two reasons why it is doubtful that the liquidity situation will change in the near future.

First, it is unlikely that in an election year the US will do anything to upset the apple-cart. Secondly, even if interest rates are raised, a change of a few basis points will make scarcely any difference to the very low interest rates now prevailing in the US.

Which is why, although FII inflows have slowed, they continue to be net buyers of Indian equities. To a large extent, profit-booking by FIIs has been offset by the entry of new FIIs into the Indian market.

The bullish view that foreign investors have of India is clearly evident from the fact that FIIs continued to be net buyers even at the height of the participatory notes controversy.

Given that international conditions remain the same, what has changed in the domestic scenario? Corporate results continue to be good, and the excellent monsoons have recharged the economy.

Other growth drivers, such as the government's road-building programme, the outsourcing story and the retail credit boom, continue to operate. In other words, there has been no change in the 'fundamentals'"" if anything, they're getting better all the time.

But, seduced by the 1000-point spurt by the Sensex in barely a month, local operators leveraged themselves in the futures market, in the belief that the momentum would continue.

Once profit-taking happened, they could no longer support their positions and the unwinding led to reverses in the cash market as well.

These operators have been left licking their wounds, which accounts for the low volumes of the past few days and the sharp reduction in open interest in the futures market.

Going forward, the markets are cautious on account of the large supply of IPOs hitting the market and the impending elections.

Also, with the third quarter results out of the way, there are no triggers for the market till the elections.

If a reasonably stable government is voted in, the next stimulus for the market will come from action on the unfinished reforms agenda.