Indian economy is entering year 2012 on a much softer note in contrast to year 2011. Fading economic growth, lack of reforms, fiscal constraints, volatility in currency, margin pressures on corporate are some of the major factors that are putting pressure on the markets.

Apart from these domestic issues, global issues like debt problems in the European region, fragile recovery in the US is another risk to the world. So far these developed nations have adopted many policies like quantitative easing, special credit lines, etc to tackle the issues, but the problem still remains very much there.

In emerging markets now there is a fear of hard landing in China because of real estate market bubble and many are of the opinion that it can jeopardize the growth in the fastest growing emerging economy. So all in all we are entering the New Year on a cautionary note.

The year 2012 would be the year in which we would see pro-growth policies by RBI if not much would happen from the fiscal side as the government is already walking on a tight rope because of higher subsidies and social programs like NREGA, Food Security Bill, etc.

The budget, to be presented in February 2012, would not bring much cheer as the duties and taxes are still lower than the pre-crisis levels and the tax collections this year so far are not up to the expectations.

We expect RBI to begin lowering the interest rate by March 2012 and that would start yielding positive results by a lag of one to two quarters. Though the current happenings are very much discounted by the markets, but a lot would depend on how the future shapes up.

There is likelihood of the market oscillating in a range next year and consolidate if things did not get worse from here. The challenging thing for the policy makers here would be to restrict any sort of moderation in economic momentum and come up with the pro-growth policies.

Interestingly, if one sees the market cap to GDP ratio (GDP at market prices at current prices and calculated by adding latest four quarter data), it is currently at around 62.25 compared to the 56.22 in March 2009, when the markets made lows. Typically ratio around 50 suggests value in the market and closer or above 100 indicates overvaluation.

The advice to the investors is to go with the old economy stocks and not beyond the BSE 500 index.

At the moment we are recommending clients to take exposure in selected stocks in sectors like IT, private banks, pharmaceuticals, FMCG, etc. Besides these equities, investors may maintain 20-25% of exposure in debt products such as corporate FDs, NCDs, etc as they can always act as cushion in case of the Euro crisis in 2012.