Is it a good time to buy Indian stocks - Not really!

Recently, the Indian market has suffered a rather painful correction for anyone who was invested there. And now there is a dilemma for investors: Is this the bottom, or is there more to go?

The Indian story is unique in certain aspects. First, it is driven in a large part by domestic consumption (unlike investment and exports as in China). Second, high commodity prices are not the primary cause behind the prosperity of the last few years (unlike Middle East and Brazil, where commodity exports make up a big chunk of the economy). As such, even if US economy slows and commodity prices soften, the Indian growth story should remain untouched to a large extent.

But when we talk about stocks, things are a bit different. For stocks are impacted not only by underlying fundamentals, but also by liquidity flows. And that is where the concern lies.

Currently, foreign investors are key players in the Indian markets, through various emerging market funds and hedge funds. And so, if the foreign investors were to yank money out of these emerging market funds, these funds would be forced to sell securities that they hold, including Indian securities. So while the Indian story is different, it is clubbed together with other emerging markets for investment purposes. So where goes the emerging markets, so will go India.

And so the key question becomes - are the US, European and Japanese investors going to withdraw money at a rapid clip out of the emerging market funds?

I doubt whether anyone knows the answer to that question for the next two months. The next Fed meeting is on June 29th. Till that time, I think the US market is going to get conflicting reports on where inflation and economic growth are headed. So while there will be a lot of volatility in the US markets, there will not be in any direction.

After June 29, the focus will shift to when the Bank of Japan raises its short-term rates. It could happen anytime between July and September, which would create another uncertainty in the markets. So I think that investing in Indian stocks would remain a risky proposition at least till July. But the growth story exists in India - between January and March 2006, the economy grew at 9.3%. So when the time is right, stepping into the market could produce a number of winners. That time is, however, not now.