Are Indian Markets headed for a crash?

During the last 42 months, the Indian Stock Market, represented by Sensex and BSE-100 Index, has grown by a whooping 290 per cent giving investors lot to cheer.

Most of the stock market Analysts and investors are still quite bullish on Indian markets and expect it to rich even further in coming months.

However, I came across an interesting article mentioning that Indian stock market can come down drastically if Foreign Institutional Investors (FIIs) were to pull out money from Indian Market. The article quotes study done by global research and consultancy firm Evalueserve, stating Indian Stock Market could come down to as low as 14000 points within a quarter.

While strong inflow of funds from foreign institutional investors (FIIs) has been a reason to cheer, it could turn into a nightmare and if the global investors make a sudden exit with about 12 billion dollars within a quarter, it can send the bourses crashing by around 30 per cent, according to global research and consultancy firm Evalueserve.

“This would imply a level of 14,000 for Sensex, which was the level around a year ago” Evalueserve chairman and founder Alok Aggarwal said in a white paper named ‘The Indian Stock Market Continued Boom or Impending Bust?’

This sudden exodus could also lead to the rupee depreciating by six per cent, it said, adding that such a scenario would lead to a bout of inflation and negatively impact the current account deficit, although, an immediate depreciation of rupee would not be catastrophic.

“This could potentially lead to a vicious cycle whereby more FII money leaves India, which in turn would lead to further losses in Sensex, depreciation of the rupee, and even higher inflation,” Aggarwal noted.

While it is true that huge FII investments have pulled Indian Markets to dizzy heights - more than 49 billion dollars in last 51 months - I see it very unlikely that FII’s would pull out money from Indian markets, given India's growth and economy outlook. If anything, they would put in more money.

If you follow markets closely, you would have seen that last few days have seen global markets crash quite a bit on the news of US recession. However, Indian markets seemed to be quite immune to the news. Few analysts have even gone ahead and mentioned that FIIs are pulling out money from US / UK markets and putting it in India!