Benchmark Indian equity indices fell about 3.5 per cent over the past week as a much awaited correction got underway in one of the world’s top performing markets this year. Geopolitical tensions and a slew of disappointing corporate earnings triggered the sell-off and the near-term outlook appears weighed down by uncertainties.

There are downside risks to the official growth forecast of 6.75-7.5 per cent for the current financial year that ends next March, New Delhi said in a midyear economic report on Friday, underscoring teething problems with big policy initiatives.

“There has been an across-the-board deceleration in real activity,” Arvind Subramanian, the government’s chief economic adviser and the author of the report, told reporters. “It is unlikely than before that we will achieve the upper end of the growth estimates.”

The government launched a new national sales tax on July 1, touted as the biggest tax reform in 70 years, but a series of missteps regarding the rules have caused much unease among businessmen. Confusion about the cumbersome multi-slabs that products come under is holding up production and shipments. Adding to the problems, the government has been tinkering with the levy to maximise revenue.

A private survey last week found that factory activity contracted in July as businesses grappled with the new Goods and Services Tax. Economic growth, which had slowed to more than a two-year low of 6.1 per cent in the March quarter due to the disruption caused by a demonetisation drive last November, could see more surprises because of policy implementation gone awry.

Headwinds

“The economy is facing headwinds,” said equity strategist V. Venugopal. “This is a passing phase but a good excuse to cool the stock market.”

The top-30 Sensex closed at 31,213.59, down 3.4 per cent over the week and more than 1,400 points off the record high 32,686.48 reached on August 2. The widely tracked benchmark had risen more than a fifth this year before the pull back.

The 50-share Nifty, which is mimicked by fund managers for the their portfolio, shed 3.5 per cent to 9,710.80 and is off more than 425 points from its peak of 10,137.85 hit just over a week earlier.

“It is a welcome correction in the market now. We would expect the markets to come down to 9,400-9,500 levels,” Pankaj Pandey, head of research at ICICIdirect.com, told ET Now television channel, referring to the Nifty.

Rising tensions between North Korea and Washington have cast a shadow over global markets, and accelerating war of words would cause more unease among investors. India is also facing a barrage of acrimonious lecture and threats from Beijing over a standoff on the Bhutan border with China.

Adding to the sullen mood, earnings from big companies were a big disappointment, and investors voted with their feet. Government-controlled State Bank of India, the country’s biggest commercial lender, reported a build-up of bad loans, sending its shares down 5.4 per cent on Friday. SBI, which merged some of its associate banks and another lender with itself in April, said its gross non-performing assets (NPAs) as a percentage of total loans rose to 9.97 per cent in the June quarter from 9.11 per cent in January-March. The net NPA ratio rose to 5.97 per cent from 5.19 per cent.

Sun Pharmaceutical Industries Ltd stunned investors by announcing a net loss of Rs4.25 billion, compared with market expectations for a profit of Rs11.5 billion. The company, which gets about half its revenue from America, was hurt by Rs9.51 billion US antitrust colony. Tougher US quality standards as well as higher product approvals for generic medicines have led to more competition and falling prices.

“The reason why we are suffering is our inability to execute,” Chief Executive Dilip Shanghvi said on a conference call. “The only solution is our focus on improving execution.”

Sun shares tumbled almost 11 per cent over the week to Rs451.30.

Keep investing, watchfully

Pundits say do not be fooled by the dark clouds, instead look for opportunities to buy stocks at bargains as the long-term outlook remains decidedly upbeat. A central bank study showed that assets under management by mutual funds hit a record Rs17.5 trillion at end-March, and accelerated to an all-time high of Rs20 trillion by the end of July.

“There is no point in timing a correction,” ICICIdirect.com’s Pandey said, “which is why we have been consistently telling our customers to keep deploying money at all levels. We are in a structurally very positive ecosystem and from that perspective, nothing changes for us.”

He likes Graphite India, Phillips Carbon Black, Ajanta Pharma, NCC, L&T and State Bank of India.

Brokerage CLSA is bullish on Jubilant FoodWorks Ltd, which has the franchise for Domino’s Pizza in the subcontinent, with a target price of Rs1,600, compared with Friday’s close of Rs1,296.65. “Jubilant Food is in the ‘re-imagine, reinvent and reinforce’ mode. The company is on the recover y path led by a series of self-help measures,” it said.

Japanese brokerage Nomura upgraded its target price on leading food company Britannia Industries Ltd to Rs4,760, saying “risk-reward looks favourable”. The stock closed at Rs4,100.30 on Friday.

Shares in state-controlled Cochin Shipyard Ltd soared 20.8 per cent on debut to Rs522 on Friday, after the initial public offering to raise up to Rs14.68 billion was subscribed 76.2 times. The company is a leading maker of warships and commercial vessels as well as undertaking major ship repairs.

State-run reinsurer General Insurance Corporation of India filed a draft red herring prospectus with the market regulator for an initial public offering, which could raise as much as Rs100 billion. The IPO, a combination of new shares and an offer for sale, is part of the government’s plans to reduce its stake by 25 per cent in five fully owned non-life insurance companies.

The annual dividend that the central bank pays to the government has halved to Rs306.59 billion, which economists say is because of absorbing excess liquidity in the system and high cost of printing new currency notes after Prime Minister Narendra Modi last November banned high-value notes that made up 86 per cent of the money in circulation.

The drop is expected to blow a hole in the government’s budget, but there is enough time to soften the blow. Aggressive divestments of state holdings, for instance, could help New Delhi tide over the shortfall thanks to a bullish stock market.

The writer is a journalist based in India.