Indian benchmark indices corrected through this week and the Sensex has given-up more than 500 points, since the start of the week. Here are a few reasons why the markets are likely to dip a little more.
Surging crude prices
Petrol and diesel prices in India are near record levels, as Brent Crude prices have risen to $80 a barrel. Since India imports crude to meet its requirements, this tends to get reflected in the inflation numbers and hence a rise in interest rates.
Following the Karnataka elections, there are worries that the BJP popularity is fading. In fact, the Congress despite being second to the BJP in Karnataka, managed a higher vote share then the BJP.
There are worries that with key state elections lined-up, before the central government elections next year, less work would be done. In fact, it is likely that we may see no major decisions being taken.
In fact, what looked certain second term for Narendra Modi, is getting increasingly uncertain.
Bond yields are rising across Europe and also in India. Sovereign bond yields have now hit 7.84 per cent in India, which is way above 7.40 per cent prevailing in July last year. Rising yields are always a worry for markets in India, as investors can now begin moving money from equity to debt, chasing higher yields.
This is not only happening in India, but, across the globe. In the US the yields have surged past the 3.10 levels, for the first time since 2008. If yields keep rising, we could see moving away from equities into debt.
RBI may hike interest rates
The RBI may now also look to hike interest rates very shortly, as inflation has surged in April. In fact, economists had never pencilled in, the possibility of a hike in June, are no longer ruling the same out. It is highly possible that we may shortly see a hike in interest rates in the month of June itself.
If not June, then August looks a near certainty.
The Sensex is trading at a P/E of 24 times its trailing EPS. This is extremely expensive, when compared to its long term average of 17 times. As much, the markets are not very cheap. Hence, markets are unlikely to go up sharply from here on and investors must exercise caution.