Benchmark indices have lost nearly 10 per cent since the Budget Announcement of July 5. The imposition of tax surcharge on the super rich, is likely to hurt Foreign Portfolio Investors (FPIs) as well, who have been registered as trusts. According to reports, there are nearly 40 per cent FPIs, who will have to convert themselves into corporates or end-up paying higher tax.

This over the last few weeks has led to sustained selling by Foreign Portfolio Investors, which has pulled down domestic indices. They maybe preferring to sell stocks and walk away, instead of simply paying more tax.

For the month of July, FPIs have net sold in the domestic market to the tune of Rs 16,870 crores and have begun pressing sales in the month of August as well.

In the first day of August, they have net sold into the cash markets to the tune of Rs 1,085 crores. Persistent selling by these sets of institutions, is likely to see more downward pressure in the markets.

A slowdown in the economy is evident

Tax surcharge is not the only reason FPIs are selling. As slowdown in the economy is pretty much evident looking at data. Sales at India's largest car maker Maruti saw sales slump in the month of July. Sales of mini cars Alto and old WagonR fell 69.3 per cent to 11,577 units, those of compacts (Swift, DZire, Baleno, Ignis, Celerio and new WagonR) fell 22.7 per cent to 57,512 units in com

Mahindra & Mahindra Ltd also saw auto sales declining 15 percent to 40,142 units on a yearly basis last month while its tractor sales fell 12 percent to 19,992 units, according to its stock exchange filing

Bajaj Auto, Eicher Motors and Honda Cars also saw a sales fall. In fact, Honda saw auto sales declining 48 percent to 40,142 units on a yearly basis last month.

Slowing auto sales will have a drag on auto loans, and banks which are retail oriented like HDFC Bank, may see a slowdown in numbers. The liquidity crunch facing the NBFC sector is likely to further aggravate the problem of a slowdown in the economy.

Should you buy stocks now?

If the markets were to fall another 5 per cent from here, it may look all the more attractive. At the current levels, you would not want to catch a falling knife, given the way there has been a slowdown. The Sensex companies p/e is still at about 24 times one year forward earnings, which is still expensive. Wait for a further fall before buying.

GoodReturns.in