From its lifetime peak (intra-day) of 6954.86 levels on March 9, 2005, the Sensex steadily declined in the past 12 days and is currently hovering around 6600 levels.
While analysts and fund managers are still bullish on the overall outlook for Indian markets, there is an unmistakable sense of caution in the markets as FY05 nears its end.
Foreign institutional investors, who have been the big factor in providing the liquidity base for the markets in the past two years, are also showing signs of fatigue. FIIs have been sellers to the tune of Rs 198.80 crore (Rs 1.988 billion) and Rs 46.10 crore (Rs 461 million) on March 16 and 17.
While high oil prices are said to be acting as a deterrent for FIIs, retail investors, too, have been booking profits at higher levels. The concern is that with liquidity drying up, markets can lose much of its sheen.
However, one positive aspect has been that domestic mutual funds -- flush with cash after a spate of IPOs -- have continued to be net buyers into equities.
But the downsides this month are no surprise. Empirical evidence suggests that Indian markets have a tendency to fall in March. If you go by the trends since 1991, March has proved to be the most likely month when the markets tend to turn southwards.
In other words, March may prove to be the best opportunity for buying into equities, considering the current bullish outlook on the Indian markets.
As per a recent study done by Mumbai-based securities firm, Dimensional Securities, the markets have fallen by about -5.6 per cent on an average in March.
"We believe that the markets have a tendency to fall in March due to the cleaning of books and the rebalancing of portfolios by individuals and corporates in order to make way for smooth tax payments," notes Kishor Bagri, research analyst at Dimensional Securities.
Investors sell off in March so that they can set off the loss against capital gains elsewhere, thereby paying less tax.
According to analyst Parthapratim Gupta of Dimensional Securities, market returns in March are more often than not impacted by the Budget which is usually announced towards the end of February. Thus, to arrive at a fairer picture, the study assumes that that the markets discount all the impact of the Budget within four trading days.
While it is true that such statistical exercises may not hold good all the time, it does provide an interesting insight into general market trends. The study calculated market returns in March and has segregated the same in three segments:
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Returns for the period from the Budget day (if presented in February) to four trading days after the Budget.
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Returns for March.
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Returns for March, excluding the first four trading days if the Budget was presented in February (during 1991, 1996, 1998 and 2004, the Budget was not presented in February).
From table 1 it can be surmised that the markets do have a tendency to fall in March (average -5.64 per cent). It has excluded the years 1991, 1992 and 1998 for calculating the average.
While the first two years witnessed a tremendous upturn, following the announcement of the reform process by the then Finance Minister Manmohan Singh, 1998 has been excluded from the calculations as market performance that year was influenced by political factors, with a stable government coming in after two years of turbulence.
Interestingly, the average returns for March (excluding the first four trading days) is almost similar at -5.54 per cent. This implies that market comes back to the same level after four trading sessions post- Budget to the pre-Budget levels.
A comparison of the market returns for the period of January-February and March (table 2) reveal that of the total 14 years since 1991, the markets have fallen 11 times in March from the last day of February.
The three times it was otherwise were 1992, 1998 and 1999. Returns have been negative in March for eight of 14 years after registering positive returns in the period between December and February.
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