From its peak reached just a few weeks ago, the Indian stock market is down more than 12 percent. This is in keeping with the trend in markets around the world, with most showing declines between 10 and 15 percent.

But January 2008 wil be remembered not just for stock market declines; it is also themonth when the US FED decreased the overnight lending rate (Fed Funds rate) by a rather large 125basis points, the fastest such decline since 1982.

Given this global turmoil, the RBI, somewhat surprisingly, chose to stay pat at rather elevated levels ofreal interest rates. No change in policy was Dr. Reddy's pronouncement. Meanwhile, FII investments inIndia, after scaling a peak of $ 17 bil ion in 2007, have just dropped by about a fifth, or $ 3 bil ion, inJanuary. What is the implication of all of this sel ing for the Indian stock market? Is it time for the Indianinvestor to pack her bags, pocket the gains and put the money in fixed deposits? No. On the contrary itis time to be fully invested.

The reason for this recommendation is simple - most of the worst news, both for India and the worldeconomy, is behind us. So far the bad news has consisted of the sub-prime crisis where a lot of bankshave lost a lot of money. And the housing market in large parts of the world, and especial y the US, haspeaked. This has led for analysts to call for a recession in the US, which it is argued, would hurt all stockmarkets rather badly.

The recession (defined as two successive quarters of negative growth in GDP) in the US has not yetoccurred, but the stock markets have fal en as if this has already happened. This is one argument to ful yinvested in the Indian market i.e. if the worst case scenario has already been discounted, how muchworse can the news from the US get? The key in markets is news versus expectations; markets adjustsome three to six months before the event. So the surprise to the market would be not if the USrecession happens but if the recession is deeper than what is expected today. In probability terms, thatis less than a 20 percent chance i.e. not worth making the bet.

There are several reasons to be ful y invested in the Indian stock market (at approximately 5150 on theNifty and 17700 on the Sensex). Interest rates are likely to fal this year in India; the RBI, stuck in itsmonetary manhole, wil have to relent to the reality of the irrelevance of blind monetarism some timeover the next few months. It is only for so long that one can march to a discordant tune. Thegovernment (most likely the Ministry of Finance) has also realized the fol y of its ways in letting therupee appreciate to make industry, and the economy, uncompetitive. Looking forward, one hopes, andexpects, that things can only improve on this front. Internationally, except against a few mercantilistAsian economies, the US dol ar should appreciate; it is on its historical lows.

All these factors suggest that the future environment for Indian equities is quite positive. There is alsoan additional important reason. The Indian economy today is much more dependent on investment thanexports. The latest GDP data released by the CSO indicates that the investment rate in 2006/7 was 36percent of GDP. Just a few years ago, this rate was 24 % of GDP. In 2008/9, the investment share in GDPis likely to be close to 40 percent. Thus, looking forward, GDP growth in India next year is likely to beclose to 9 %, or earnings growth close to 25 percent. Very soon, most likely by 2010, the Indian economyis likely to grow faster than China's. Given all these factors, is there any reason to stay out of the Indianmarket, especial y when it is trading at 17 times future earnings?