Last Friday's tumble on Wall Street, with the Dow Jones index falling nearly 400 points, is sure to have its repercussions on the already shaky Indian market. With both the benchmark indices, the Bombay Stock Exchange Sensex and the National Stock Exchange Nifty having lost 5 per cent apiece last week, investors are already skittish.

With foreign institutional investors having pulled out close to Rs 20,000 crore, India is already the second-worst performing emerging market till date in 2008, the Sensex having lost 23 per cent.

Andrew Holland, head, DSP Merrill Lynch, said that the Indian market could not escape the pain that the global markets were seeing. "If risk is being taken off the table, it's being taken off the table," he said.

A fall to the lows of March 17, 2008 when the Sensex hit 14,809 and the Nifty closed at 4,503 cannot be ruled out.
Rashesh Shah, chairman, Edelweiss Capital, said: "The market has been in a downturn for some time now and we are barely 5 per cent away from March lows, so the Nifty should settle somewhere near 4,500, give or take 500 points. If you look at it in dollar terms, we have already hit the March lows."

In fact, 47 per cent of the top 200 stocks are already trading at below their March lows while for a larger sample of 2,873 companies, the share is a little lower at 43 per cent.

The weaker operating environment compared to even six months ago, explained Nilesh Shah, deputy managing director, ICICI [Get Quote] Prudential AMC, has resulted in investors doubting whether there is enough macroeconomic stability to ensure strong growth over a sustained period.

"The India story has been all about growth. While the earnings growth may ultimately come through, the price-earnings (P/E) multiple that India commands appears to have fallen somewhat and to that extent the market has been slightly de-rated," he said.

Indeed, with inflation ruling at 8 per cent-plus, the rupee depreciating and interest rates headed north, DSP's Holland felt that higher input costs are going to result in earnings being downgraded.

LOW TIDE
Country	Index	31/12/07	6/6/2008	%chg
China	Shanghai Composite	5261.56	3329.67	-36.72
India	Sensex	20286.99	15572.18	-23.24
Malaysia	KLSE Composite	1445.03	1248.57	-13.59
Indonesia	Jakarta Composite	2745.83	2402.24	-12.51
Singapore	FSSTI Index	3465.63	3146.73	-9.20
South Korea	KOSPI Index	1897.13	1832.31	-3.42
Russia	Moscow Times	25199.22	24896.18	-1.20
Taiwan	Taiwan Weighted	8506.28	8745.35	2.81
Brazil	Bovespa	63886.00	69786.00	9.23
Source : Bloomberg

"We're already starting to see some of that," he said. If that happens, India, which is already one of the most expensive emerging markets, will remain so even if the market comes off. 
 
A recent Merrill Lynch report highlights that India is trading at over 17 times twelve months forward earnings, way above Korea at 12 times or Taiwan at 13.4 times. That is why most foreign brokerages have been neutral or underweight on India for some time now.

"Foreign investors haven't been too comfortable with India's valuations, given the rupee depreciating. However, since they have already pared their positions, the fall from here on should be less steep," Shah explained.