Volatile market: Invest at every dip

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Volatile market: Invest at every dip

We have seen the markets going up almost 50 percent from the level of June 2006. The main reasons of this sharp rise include fresh funds inflow from foreign investors, strong results by Indian companies and positive sentiments of investors. On one side people who invested in the stock markets have made good profits, and on the other side, there are people who are waiting for the market to correct in order to make fresh investments.

We have seen correction in the stock market in the last few days. The trigger of this correction was the news of the Reserve Bank of India (RBI) increasing the cash reserve ratio (CRR) for banks. Correction is a healthy sign for the stock markets and it was well anticipated this time, given the strong run-up seen in last few months. As far as market fundamental is concerned, nothing much has changed from last few weeks.

If we analyse the recent CRR increase by RBI, we see that one of the main objectives of RBI is to contain the inflation rate within an acceptable range. Foreign investors have pumped in a lot of fresh money into Indian markets in the last one year. In order to check the foreign exchange rate fluctuations, the RBI had purchased these extra dollars available in the market.

As a result the money supply has gone up in the market. This resulted in a situation where a lot of money was chasing fewer goods and hence a rise in inflation. With increase in the CRR, the RBI is trying to reduce this excess liquidity in order to contain the inflation level.

We cannot rule out further volatility in the markets in the short term, but the market bullishness seems intact for the medium and long-term perspective.

Global markets are more or less stable. Crude oil prices are stable and trading in the range of USD 60. Indian companies have delivered good results in the past few quarters and there are no reasons to believe that they will not deliver good results in the coming few quarters.