Till a few weeks back, the Indian stock markets were scaling newer heights as the BSE Sensex touched its all-time peak of 14,723.88 points on February 9. Strong growth numbers, both on the macroeconomic and corporate earnings fronts, sent valuations soaring.

On March 9, the Sensex was at 12,884.99 points, down by 1839 points--around 12.5 per cent, and investors are still uncertain whether this is an end of the correction, or the beginning of a bear market.

We posed this question to a panel of experts. Their opinion is divided. For some of them, these levels appear reasonable, while others call for more patience as they await a farther bottom.

There were a number of culprits to push the markets off the cliff. To start with, the Budget along with the mayhem in Chinese markets took the lead chopping off 500-odd points.

The following week saw a global slump, which caused ripples across the Indian shores too. The unwinding of yen carry trade made global investors averse to risks across almost all asset classes including real estate, equities, bonds and commodities, and as a result, foreign institutional investors (FIIs) started pulling the plug off Indian markets.

The yen carry trade is a play on currencies and interest rates where yen is borrowed at near-zero interest rates and is then invested in higher yielding asset classes across the world.

With the strengthening of the Japanese economy, and speculation that interest rates will rise in Japan, investors are quickly exiting from high risk asset classes as the investments of borrowed yen are highly intertwined in order to hedge currency risk. Markets continue to remain uncertain largely because the net amount of floating yen carry trade is not known.

A closer look at FII activity in the Indian markets over the past couple of weeks demonstrates the causes of volatility.

Adding fuel to this uncertainty are domestic factors such as government intervention in industries like cement and steel in order to control inflation and the impact of the Budget on industries like information technology.

While the outlook still looks hazy going further, we try to read what is on the minds of various fund managers and research heads at broking firms.

Anoop Bhaskar, Head, Equity, Sundaram BNP Paribas Asset Management:

The market outlook will remain cautious over the next two-three months, and investors may want to wait until the global markets stabilise.

In the domestic market, there is uncertainty over interest rates, so we would like to wait for interest rates to peak out, before expecting any significant upside. There are signs that interest rates could fall after a couple of months.

In order to bring about stability in the markets, infrastructure growth, which is lagging behind industrial growth, should come up. This will be an important factor as significant investments need to be made in infrastructure over the next 12-18 months.

The undercurrent for the markets in the longer term however remains strongly positive as this year foreign direct investments are higher than foreign institutional investments. Apart from this, the domestic consumption and capital goods sectors are expected to remain buoyant.

Anup Maheshwari, Head, Equities and Corporate Strategy, DSP Merrill Lynch Mutual Fund:

No strong views can be taken on the markets as the mood of the markets will depend largely on how global markets behave for the next couple of months.

Rising interest rates and liquidity concerns remain the major worries for the markets, while the government's policy toward inflation will also drive the markets. FII flows may be another cause of worry, while positive corporate guidance and sustained performance may support the markets.

The near-term outlook looks flattish to marginally downward. The uncertainty may continue until June and we're expecting it to turn positive once the quarterly results start coming in.

Sectors like technology, media, telecom, engineering, pharma and automobiles appear positive. Banking, cement, construction and sugar may remain under pressure in the near-to-medium term.

Deepak Jasani, Head, Research, HDFC Securities:

The markets may continue to witness choppiness until the fear of the yen carry trade reversal recedes.

On the policy front, one cannot expect radical reforms until the Uttar Pradesh elections are over and persistent initiatives to control inflation may be seen which may add to the volatility.

Last week, we seem to have recovered from the lows, however, a sustainable bottom does not seem to have been made. In spite of this, we may not see sharp declines in the coming weeks.

Commodity inflation and the demand-supply mismatch, along with expectations of continued monetary tightening remain the prominent causes of worry in the short term.

On the other hand, sustained macroeconomic as well as sector-wise growth along with improving demographics and infrastructure will prove to be a positive for the longer term.

Capital goods, telecom and healthcare appear to be good. Technology too, will remain strong, barring short term worries of minimum alternate tax and rupee appreciation against the dollar. Commodities and banks (more so, on the PSU front) may have to face the heat over the coming months.

Prateek Agrawal, vice president and head of equity, ABN AMRO Asset Management:

The markets have corrected almost around 16 per cent from the top and valuations are now looking much more reasonable.

In times like these when markets are correcting sharply, looking at the longer term picture provides a lot of confidence. Liquidity, however, is an area where we are experiencing some amount of short term stress.

Japanese interest rates have gone up and their currency has appreciated. This has made leveraging in yen, for the purpose of investing into other currencies more expensive, and hence we are looking at some amount of selling.

This is clearly seen to be a temporary phenomenon because once the currency stabilises, the costs of trades would revert back to historical levels. Clearly, our belief is that what we have witnessed is a correction and over time we would get back to where we were sooner than later.

Any cut in interest rate in India would be taken positively by the market. The major concern is the time it may take for the first interest rate cut to be enforced. After the correction, the valuations in the market look reasonable and sector biases seem to have been removed.

R Sreesankar, Head, Research, IL&FS Investsmart:

The markets will continue to remain extremely volatile in the coming few months due to global risk aversion because people are not willing to pay a premium for earnings even though the earnings remain intact.

Therefore, the P/E ratios will contract. The shorter term impact of the budget has not been positive. Interest rates are significantly high riding on the back of high demand for credit from banks, while banks are gradually left with lesser money to lend.

Inflation too augments the concern for rising interest rates.

Corporate earnings growth will sustain, and a lot of capital expenditure is underway, which will provide a boost to the markets. On the other hand, supply of commodities like sugar and cement is expected to increase, which needs to be discounted from their profits and earnings.

In the coming months, individual sectors are not expected to make a great story. Instead investors may want to look at a number of stocks which are trading below book value. Apart from that, some mid-cap valuations are reasonable with a potential to scale up.

Ridham Desai, managing director, Morgan Stanley:

Markets are expected to remain tentative due to political and inflationary concerns. The Indian markets already have a high-beta status, which makes the Sensex highly volatile due to global changes.

Therefore, lowering global risk appetite also may play a role in pulling the markets down. Add to this, demand is running ahead of supply, which may keep inflation high.

We also expect a slowdown in demand growth in the second half of the year. As a result, we may see lower levels going further.

Strong corporate sentiment and rising foreign direct investments will support the markets. One may want to take a defensive stance over the next 12 months, so one could avoid rain-sensitive and consumer cyclical stocks. Energy, healthcare, technology and telecom are expected to perform better.

Shriram Iyer, Head, Research, Edelweiss Securities:

We shall witness volatility due to a significant influence of global markets which would determine liquidity.

Strong macroeconomic performance and robust corporate earnings will serve as a floor for the Sensex. The market is expected to consolidate over the next couple of quarters.

Policy measures may help temper inflation by the month of May. However, there will be a negative impact if inflation is controlled with a reduction in demand rather than an increased supply.

Improving demographics, rising infrastructure spending, and an assured earnings growth are likely to pull the markets out of its slump. Pharmaceuticals, infrastructure and information technology stocks are expected to be bullish, while commodity stocks may remain bearish.

Sandip Sabharwal, Chief Investment Officer, JM Financial Mutual Fund:

We are approaching the last stage of the corrective phase where from the current levels the downside to the market is hardly 3 to 4 per cent, while the upside potential is of 30 per cent over the next one year.

A panic bottom is expected to be formed this week and the worst case scenario for the market is a Sensex of 11,900 to 12,000. There is, however, no reason to panic as economic growth prospects remain strong and markets are likely to bounce back strongly over the next few weeks.

From the last Sensex bottom of 8,800 of May 2006 the corporate profit growth has been over 30 per cent and as such the bottom now should be 30 per cent above the last bottom which also comes to 11,800 to 11,900. We view this correction as a good entry point.

Sectors like technology, automobiles, capital goods and construction look extremely positive, both from a growth and valuation perspective.

Sanjay Sinha, Head, Equity, SBI Mutual Fund:

The market mood has turned cautious and concern arises from the yen carry trade where two factors - the size of the yen carry trade and its complex nature - need to be understood for uncertainty to clear out.

There is a probability of Indian markets to rebound from current levels if global markets stabilise at these levels.

With rising interest rates, industrial production which is operating at full capacity at present, may get affected and the marginal cost of expanding capacity would rise sharply. Liquidity concerns  arising from FII activity is another negative.

However, in 2006 FIIs amounted to about $8 billion as compared to about $10.5 billion in 2005, but the domestic mutual funds and insurance investments in the markets picked up, and the trend may continue in 2007 as well.

Among the positives, robust corporate earnings and growth in domestic consumption will build up the momentum.

In the coming year, the market is expected to remain stock focused rather than sector focused.