By Geetanjali Kedia

The Indian stock markets have reacted very sharply as Shanghai Composite slipped 3.5% today. The Chinese markets have lost nearly 10% in the last four trading sessions, while both BSE Sensex and S&P CNX Nifty are down about 2% today, with Sensex slipping below the 20K mark first time in past 18 days.

There are fears of China hiking interest rates in order to curb the domestic inflationary pressures, especially to control its accelerating food inflation. Inflation in China is at a 25 month high, with consumer price inflation rising 4.4% (YoY) in October. Of this, food, which makes up about one-third of China's consumer price index, led the way, by climbing 10.1%, while non-food items increased just 1.6%. Global prices of grains, cotton and edible oil have risen noticeably, leading to added pressure on China's food inflation.

There is also speculation that price controls may be introduced by the Chinese Government to control inflation, which will curb raw material demand and in-turn hurt the earnings of commodity companies and property developers. As a knee-jerk reaction, a lot of selling is seen on metals, realty and capital goods counters in India. BSE Realty index is down 2.4%, while the Capital Goods index is 2.6% in the red. Sharpest beating has been taken by the high beta Metal index which is down 3.6% today.

Any slowdown in Chinese economy has repercussions across the globe as it might lead to a slowdown in demand for commodities, and metals in particular. Although there seems to be no major concern on the domestic front which has seen good Q2 results, Indian equity markets is witnessing some unwinding of the over-leveraged positions by hedge funds. FIIs have been net buyers in the last 5 trading session in the Indian equity market, which re-affirms that they continue to maintain bullish view on India.

Hence, until and unless the sign of weakness disappear and the global situation improves, domestic markets will have to face the music. Downside seems to be limited for our markets. However, volatility is here to stay, till clarity emerges on the dragon's next move.