Indian stocks crumbled following negative overnight cues from the US and weak Asian markets. The Nifty closed at 5,705 down 207.9 points, while the Sensex shut shop at 19,013 down 687.12 points.

Rajesh Jain, Director and CEO, Pranav Securities, attributes the fall in the market to FII selling and lack of retail buying. He feels investors will be forced to review their portfolio if this negative trend continues for another week.

According to Jain, the fall may be for yet another 500 or 1,000 points, which is where you start building your long-term portfolio at this point. “Be prepared for another 1,000-1,500 Sensex fall or another 500 Nifty fall. I would not write doomsday yet on the Indian markets and we have empirical evidence at least six times during 2007 for this.”

Excerpts from CNBC-TV18’s exclusive interview with Rajesh Jain:

Q: What have you put this last hour of weakness down to?

A: The core reason has to be the absence of buying, in the market, at a time when one is seeing FIIs selling. It is also a day when you see the market fall off the way after recovering well in the morning. Perhaps, we are at the tipping point, where in a do-not-sell market, people will now review their portfolio, get out of weaker stocks, or take gains and move out of equities for the time now. That sort of rethink can start happening if this negative trend continues for another week.

Q: What is your reading of the derivative situation right now?

A: The thing that glares at you from the TV screen at this point is the premium on Nifty futures. If you couple that with the theory of shorts in the system, which will have to be covered up, I don’t think it is all doomsday for traders or for the markets yet. While one doesn’t want to be a perennial optimist and square up positions on a day when the markets have fallen like this, one can also not ignore that several times in the past, when the markets have fallen greater than 500 points and then within three trading sessions recovered all of that and posted a new high or level. There is an event happening, the Reliance Power issue. There are global problems that are bound to have an impact and this market was a do-not-sell market. Retail might have just started selling a few minutes or hours ago, finally believing that the reversal of the market may be around the corner.

One should not forget all the positives that we have heard and the economic reality that stares us across India, which is that there is a Budget around the corner. This is also a fact that India remains one of the better destinations for investment ‑ rupees, dollars, what have you. It has one of the best growth rates waiting to happen. So, when allocations for global investment takes place, you will realize that this sharp fall over the last week or last two days, has created a good buying zone. Around the 5,600 mark, a lot of us would feel very comfortable buying headline stocks and some of the off-center stocks.

Looking at the derivative situation, my own conclusion is do not be surprised at an initial dead cat bounce, or an even higher level during January itself as overseas allocation get finalised and leading stocks find themselves in very attractive mouthwatering buy zones as a result of the current fall. The fall may be for yet another 500 or 1,000 points, which is where you start building your long-term portfolio at this point. Be prepared for another 1,000-1,500 Sensex fall or another 500 Nifty fall. I would not write doomsday yet on the Indian markets and we have empirical evidence at least six times during 2007 for this.

Q: In the midcap space from the liquid lot, can you think of two-three stocks which one can accumulate after the correction of the last few days or is it too early?

A: It could be little early because we don’t know when the poison will completely evacuate from the system. By combining management quality and business model strength, one could go with stocks like Voltas, Sintex Industries, and may be an Indian Bank. The fundamental qualities and the kind of levels that one would now get them at would easily warrant a 50% growth, if the market stays stable over the year and the business models perform as expected.

Q: What happens to Reliance Power now from here because subscriptions have closed and the markets got into a downturn? Any sense of how people will approach it on listing? How things may stack up eventually there?

A: The entire Reliance Power issue has to have greater than 50% element of people playing it for the pop, including the institutional segment. A large part of the liquidity sell off that we have seen, even from the FII segment, would have to do with huge subscription levels in the Reliance Power issue.

Today’s market fall could lead some of the nervy investors to probably withdraw or bounce their cheques. I would not be surprised if a 2-5% rejection happens because the markets has fallen sharply and could fall again on Monday. I would expect the rest of the applications to stay with the issue as the credibility of Reliance’s name is there and most of its past issues have performed well and turned out to be multi-baggers for investors. So, 60-70% of people would play it for the pop in listing which would give great returns, if one is lucky enough to get an allotment.

A lot of the institutional segment would stay invested including the larger HNIs and sub-investors. There is no reason to believe Reliance Power should not repeat its sterling track record of the other Reliance group companies as far as the public offer is concerned.

Q: Is there anything in specific that stood out in the Reliance numbers, because it seems to have reacted quite negatively, since yesterday?

A: I would hesitate to give an informed view on that. I think the performance of the Reliance stock has completely to do with the technical and the position build-up in that counter and the vertical takeoff that the stock witnessed.

I think the numbers were excellent and many of us would find very little negative in the entire delivery model. If anything, there is more to expect, given the imminent commissioning of Reliance’s RPL plant and the capacity expansion. The refining margins are too good to be true.

Q: Do you think retail is panicking after a long time or do you think it has not come to that yet?

A: If what we have read in the last couple of hours is true, one might have just initiated a rethink on the ‘do not sell’ strategy. This market has fallen too sharply and recovered even faster, too often for retail to start to think of the stocks that they have bought.

Most of the retail investors, over the last 15-18 months, are sitting on substantial profit. So, to that extent, the ability of margin calls and falls to really shake investors, is limited.

Retail has much stronger hands now. It will take another week of what we have seen, over the last two-three days, for retail to start worrying. If one really want retail to panic, it would be when one sees sustained negative FII numbers and finally a confirmation that 2008 has not bought stronger allocations for Indian markets from the FII segment. That seems very unlikely.

Retail has just started to think whether they need to look at selling some stocks.

Q: Have you heard anything about institutional selling today?

A: A lot of liquidity creation could be taking place, so as to able to bid in large numbers with the RPL issue, which promises to be giving great returns. The ‘level is the devil’ and one has seen some level base profit taking, by several investors of all hues. But there is no panic anywhere.