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So the government may not earn anything more in taxes and get embroiled in more court cases. While GAAR’s impact on the FII is discussed widely, it has a significant implication for domestic businesses as well because any tax planning tool can be dragged under it.

Spiralling inflation

While the RBI surprised the market with a 50 basis point cut in its previous meeting, it may not be able to do more because of the rising inflation. The inflation for April rose to 7.23% from 6.89% in March, well above the comfort zone of the apex bank.

This means that the investors should be prepared for the RBI’s actions in the coming months to be modest. The RBI may opt only for one rate cut of 25 bps in the next 2-3 months, says Saurabh Mukherjea, head of equities, institutional equities, Ambit Capital.

Earnings growth

A high earnings growth is a pre-requisite for a bull market and, currently, India Inc is delivering lacklustre growth. The aggregate net profit of the companies that have declared results so far in the fourth quarter of 2011-12 has shown a decent 15% sales growth, but failed miserably on the net profit front, which came down by 1%. This is because the companies are not able to pass on the increased cost pressures to the end-consumers due to a slowdown in demand, both domestically and globally.

One saving grace in the fourth quarter was the sudden appreciation in rupee, which moved up from Rs 53.27 against the dollar to Rs 51.16. This helped several companies to write back their earlier forex losses. However, the rupee is weakening once again and was at Rs 54.46 against the dollar on 18 May.

If this trend continues till end-June, there could be further forex-related losses. The impact of high interest rates and surging inflation is another factor that the companies have to deal with. The corporate results may be bad for a few more quarters, says Gilani.

Will the scenario improve?

Investors do not need to panic and exit the stock market because a major portion of the problems mentioned above have already been factored in in the prices of the stocks. The situation may also improve in the medium to long term. India should outperform other emerging markets in a year’s time, says Sharma. While there are several factors that can trigger good long-term returns, let us consider the most important ones.

Falling oil price

Among the silver linings, the fall in crude oil prices is the most important one. Brent crude is already below the $110 a barrel mark from a high of more than $125 a barrel. In addition to the problems in the US and the Eurozone, the slowdown in China is another factor that is bringing down the commodity prices, including crude oil.

We are bearish on crude oil and on other global commodities mostly because of the falling Chinese growth. The actual growth rate in China may not be more than 4-5% as against their officially declared growth of 7-8%, says Sharma of First Global.

A consistent fall in commodity prices is good for the Indian economy. If the price of crude oil comes down by another $20, most of the country’s problems, such as high inflation, current account deficit and fiscal deficit, will take care of themselves, without the government having to do anything, says Raamdeo Agrawal, joint MD, Motilal Oswal Securities.

Stimulus

With the Euro area in trouble, the probability of the US sliding back into recession is also high. The fact that the growth of the US economy is moving at a snail’s pace is bad news, but the stock market investors can spot one silver lining-the third round of quantitative easing from the US Federal Reserve.

Another round of quantitative easing may help revive the risk appetite. The massive $1.3 trillion long-term refinancing operation (LTRO) by the European Central Bank (ECB) recently has also helped increase the risk appetite. There is a high possibility of a similar kind of stimulus from the ECB if the Greece situation turns nasty.

What should investors do now?

This doesn’t mean that investors have to buy whatever is available in the market at the moment. Everyone knows that the markets are cyclic and things are bound to get better, but the question is, when? Will it be soon or after several painful months? The current situation could improve through the concerted actions of the US Fed and the ECB or be salvaged if Greece were to implement its austerity measures strictly. So, investors need to remain in a defensive mode, especially in the short term.