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Initially, we don't think we would get an opportunity to press sales since the gap down opening takes away that. Any aborted attempt at recovery would create the ground for fresh short positions.

While the Asian markets are giving mixed signals in the morning, the Indian market would most likely be ruled by its own specificity today, at least in the initial stages. The RBI has increased both CRR and Repo rates after the close of the Friday's trading session. Even if there has been a hint from the Finance Minister about further monetary tightening hardly anybody expected it to happen so soon. Thus, there has not been much of an immediate impact of the Finance Minister's statement on last Friday and this event of RBI raising rates would be more of an instance of totally unanticipated event.

However, market tends to discount quickly what it hasn't. And thus, expect a sharp gap down open. Once that is through we need to see whether the market manages to recover after the initial fall or its recovery attempt gets aborted and the fall continues further.

Initially, we don't think we would get an opportunity to press sales since the gap down opening takes away that. What we would have to do is to watch any attempt at subsequent recovery very closely-if it were to be successful then some buying may be done while any aborted attempt at recovery would create the ground for fresh short positions. The latter scenario, as of now, appears to be the more likely case.

Banks and manufacturing stocks are likely to be the hardest hit. However, pharmaceuticals and sugar stocks may not be that affected, and in case of any bounce back they are likely to do better than the rest. Among the sectors to be really badly hit would be retail, auto, consumer durables, realty, housing and construction sectors and broadly the manufacturing sector as a whole.

We have now got a clear signal from the RBI of a dear money policy. This indicates that we are in higher interest rates regime. This is corroborated by the high interest rates of 9.5% or above offered on deposits having a tenure of three years by even a conservative institution like HDFC.

Higher interest rates cause consumers to scale back big-ticket purchases and usually not long after, businesses cut back production to compensate. This stamps out inflation, but may trigger a recession. Case in point is the late 1990s when manufacturing sector went into a recession but inflation was surely controlled in the wake of a tight money policy.

The sign that should be most closely watched is the sales performance of the retail and consumption sectors. If they start faltering that would be a sure indication of a likely recession going forward. Thus, it would be better to get out of those sectors that are going to be affected. In the second half of the 1990s the saving grace has been the information technology sector but this time we need to see how they perform.

Some are of the opinion that services sector would not be affected but this may not be true. While it may not be as badly affected as the manufacturing sector but the spillover effect due to cut in spending by the consumers would also affect this sector as well. We need to be constantly on the guard to take whatever action necessary for our portfolios.

Now, with a tight money led high interest rate regime there are chances of further contraction in the PE multiple. Thus, even if the performance numbers for the last quarter continue to be good, the chances of investors settling for lower valuations of stocks appear to be fairly high.

Protection of capital is to be given primacy in such a situation. Cavalier stances in investing and/or trading might cost us dearly. Be watchful