On the BSE Sensex's Plunge: Buying Opportunity?

I wrote in my Weekly Indian Stock Report that a short-term downtrend was imminent for the Sensex. What I didn’t know was the big drop will happen Monday (and again Tuesday). The Sensex, which consists of 30 stocks, actually dropped 537.76 points yesterday before recovering a bit to close down only 400 points.

Banks led the decline in Bombay as ICICI Bank (IBN) and HDFC Bank (HDB) went down 6.5% and went 4.7%, respectively. However, Tata Motors (TTM) and Dr. Reddy’s (RDY) only saw modest declines.

Decline in Bank stocks was caused by Reserve Bank of India’s [RBI] decision to tighten liquidity by raising the cash reserve ratio [CRR] of Banks.

As it turns out Rediff (REDF) was the only Indian stocks that ended the session in green. I have no idea what’s behind the strength in Rediff lately although the buyout rumors could have something to do with it. It should be noted that Rediff and Sify (SIFY) do not trade in India. So these two stocks wouldn’t be affected as much as others. The price action for the two Indian Internet stocks justifies that sentiment as well.

I would be very careful in buying any Indian stocks right now, specially the two CEF’s IFN and IIF. Also, ICICI Bank and HDFC Bank have been on such an incredible run that they might have the most downside at this point.

Long term I am confident in the Indian markets but short term there is likely more downside ahead.

Stocks to pick up if there is more downside:

* Either HDFC Bank (HDB) or ICICI Bank (IBN)
* Tata Motors (TTM)
* Dr. Reddy’s (RDY)
* Infosys (INFY)

* One of these two Closed End Funds:

* The Indian Fund (IFN)
* Morgan Stanley India Investment Fund (IIF)

BSE Sensex 5 day chart:

Performance of Indian Stocks on Monday