What goes up must come down.

I am no expert to comment on the various reasons behind the free-fall of the Indian stock markets but I do have a my own views.When the Sensex and Nifty were flying by the day, the experts were all gung-ho about predicting the next upward milestone for the markets.Now there seems to be a reverse trend.These guys have started predicting the lows for the markets.And the lows are going lower by the day.When the Sensex was around 21K, the punters said some of the stocks were over-valued and that a correction was on the horizon.People then started talking about the US economy slowing down and the rupee strengthening hitting Indian corporates.At this time there were some people who were of the opinion that these factors will not have a considerable impact on the Indian markets as the 'fundamentals' were strong(the decoupling theory).The fundamentals, they maintain, are still strong but then why are the markets taking a nose dive?The main reason I understand is the pulling out of the foreign money by institutional investors, mainly from the US to compensate for the losses they have suffered back home due to the sub-prime crisis.How did the sub-prime mortgage crisis impact the Indian markets?Let me try to explain this mire in brief.
Financial institutions like banks sell something called financial securities to liquidate their illiquid assets.To make sure they have enough liquidity to continue lending, banks get their illiquid assets like loans(assets that are expected to become liquid over a period of time) rated by a credit rating agency and sell securities against them.These securities can be traded like shares.Now, big institutional investors had invested heavily in these securities, the prices of which tumbled once the loans against which they issued were defaulted in large numbers.To compensate for these losses, these institutional investors who were sitting on huge gains in the Indian share markets, did some big time selling.This, coupled with fears of recession in the US economy led to the nose dive of the market indices. All the 'decoupling' theories seem to have gone out of the window.
What happens now?This largely depends on how the US economic scene shapes up in the coming months.The US Federal Reserve has cut down key interest rates to ensure enough liquidity but the effectiveness of this move in the long run remains to be seen.We can only hope for the best.