Mumbai: Indian stocks fell for the sixth day in a row tracking global markets as investors were spooked about monetary tightening slowing growth in the world’s two fastest growing $1 trillion-plus (Rs46 trillion) economies—China and India. While analysts and fund managers say that Indian equities are still a great long-term investment powered by growth in the underlying economy, they expect the volatility to continue for some more time—at least until the Union Budget at the end of February.

Graphics: Ahmed Raza Khan / Mint

“The markets were priced for good news at the beginning of the year, but the good news is not forthcoming," said V. Anantha Nageswaran, the Singapore-based chief investment officer of wealth management firm Julius Baer Group and a Mint columnist. “The Chinese (monetary stimulus withdrawal), US employment and home sales numbers, the loss of popularity of (US President Barack) Obama—all played up to the uncertainty."

US unemployment is at a 26-year high, and existing home sales in that country fell 17% in December, leading investors to fear that the recovery in the world’s largest economy might take a long time. In China, the benchmark Shanghai Composite Index fell to a new three-month low, down 1% for the day, as investors expect a rate hike. China had raised bank reserve requirements by 50 basis points a fortnight ago. European markets opened weak on Wednesday, with the UK’s FTSE trading 1.4% down at 9.30pm. A basis point is 0.01 percentage point.

“Indian markets have suffered more because they’ve run significantly more than the rest of the world last year," said N. Sethuram, chief investment officer at Shinsei Asset Management (India) Pvt. Ltd.

Apart from the weakness in the global markets, Indian investors are nervous about inflation, the government’s exit policy and the supply of paper (new share sales), according to Jyotivardhan Jaipuria, head of research at Bank of America-Merrill Lynch. “As we move closer to the Budget, the news flow—about excise rate hikes and interest rate hikes—will be negative," he said.

Jaipuria expects a recovery by mid-year and has an 18,000-points Sensex target for the year ending December.

The immediate trigger for the selling is the monetary policy review coming up on Friday. An inflation rate that rose 7.31% in December will add to pressure on the Reserve Bank of India, which hasn’t hiked rates since 2006, analysts said.

While any such move will have a negative impact on interest-rate sensitive stocks in sectors such as real estate, banking and automobiles, analysts say most of these concerns have been priced in.

Real estate led the decline, with the Bombay Stock Exchange Realty index falling 17.66%. Auto companies followed closely losing 10.3%, while banks dropped 8.51%.

“We are still at the bottom of the interest rate cycle," said G. Chokkalingam, head of equities at wealth manager Barclays Wealth India. “What can cause more concern is the reversal of the (fiscal) stimulus."

In fiscal year that ended in March, the government cut excise tax and hiked spending to boost economic recovery. The low excise rates in particular have helped makers of cars and motorcycles to post robust gains in profits and show increased profitability. Any stimulus rollback plans could be announced in the Budget.

“Investors would also like to see some fiscal correctives in India," said Nageswaran. “Until the Budget is out of the way, there will be some more volatility." Indeed, the National Stock Exchange’s volatility index has been steadily climbing in the past week since it touched a low of 20.98 a fortnight ago. On Wednesday, it jumped 12% to close at 28.92.

Ashwin Ramarathinam contributed to this story.