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Indian stocks came under selling pressure on Tuesday. While the benchmark S&P BSE Sensex fell by 0.67%, deeper cuts were seen in the broader market, with both mid-cap and small-cap indices declining in excess of 1.5%. It is possible that the correction will be bought into as investors take advantage of relatively lower prices. Availability of liquidity is not an issue and global markets remain supportive.
One of the key highlights of the current rally is that it has been supported by small investors investing through mutual funds. Higher valuations will make it increasingly difficult for money managers to find value in the market. In the near to medium term, to a large extent, domestic markets will depend on how earnings expectations shape up.
Meanwhile, global markets have been relatively quiet, with the volatility index in the US hovering around multi-year lows. It is possible that markets are ignoring risks and beginning to believe that liquidity will remain abundant, and central banks will bail them out if things go wrong. That could be a risk.