Foreign Institutional investors appear to be positive on the Indian stock markets despite all the negatives currently prevailing in the economy. Even with all the challenges facing the economy, foreign institutional investors (FIIs) have pumped in over $19 billion (Rs 99,000 crore) into the Indian equity market so far in 2012 compared with a net selling of about $500 million last year.

FIIs are buying at a time when the economy is in a slow down mode and is expected to grow at just about 5.5 - 6% in the current fiscal year. The current account deficit and inflation continue to remain way above comfort levels and it appears that the government may miss the deficit target on the fiscal front.

Of course there are concerns that some of the inflows may not be genuine investments by FIIs, but Indian money stashed abroad returning to India in the form of Participatory Notes. However, at the same time the negatives facing the Indian economy as of now are short term in nature and the long term outlook for the Indian economy appears bright.

Last week although a truncated week was a positive week for the Indian stock markets with the indices faring well. The Sensex crossed the 19,000 mark and the Nifty the 5800 mark. The indices gained around 4%. Sentiment also turned bullish with a possibility of a consensus in some form emerging on the issue of FDI in multi brand retail.

There was huge interest in the banking sector with private sector banks and public sector banks recording handsome gains. In the private sector- HDFC Bank and ICICI Bank were in the limelight while State Bank of India, Bank of Baroda, and Bank of India etc. witnessed heavy buying.

Despite the run up banking stocks still look attractive and can provide investors with excellent gains over a two year time frame. Housing finance company HDFC which remained subdued for a considerable long period of time also saw the stock record huge gains in a short period of time. Whenever in a correction mode HDFC is worth a buy and should be included in a portfolio as this is a quality stock with huge upside potential backed by quality management.

Where there is a lack of quality and transparency in the Realty sector which consists of a large universe of listed stocks but very little to choose. This sector over the last two years has been beaten out of shape but is now witnessing a recovery. Considering the fact that most of these companies have lost almost huge ground in terms of share prices there is a possibility of handsome short term gains in this sector. The stock that has high transparent levels is Godrej Properties but the stock in not available cheap. On the other hand the stock of DLF a large player in the reality sector is available at a price from where the gains could be substantial once the controversies surrounding the company get resolved.

The infrastructure sector is another sector that has seen massive price destruction over the last two years but now appears to have stabilized and in this sector too the gains can be enormous once the economy reverses from the current slow-down mode. All the sectors discussed above are rate sensitive sectors and the outlook for these sectors could change once the Reserve Bank of India reverses its tight money policy.

The stock markets have been on the downtrend for more than two years despite occasional reversals. But overall holding to stocks even blue chips in this period have resulted in losses to investors. The traders have emerged better off as they were able to take advantage of the sharp swings in the stock market. Till clarity emerges the volatility in the stock markets may continue and smart traders could continue to emerge successful.

However there are indications that the slowdown witnessed in the economy is likely to reverse in the near future with government in the overdrive on the reform front and a possibility of a reversal of the stance of RBI on its tight monetary policy and it is also a known fact that markets are always ahead of times – in other words markets always discount the future. So therefore those investors who invest in stocks of blue chip companies at current prices and further declines will have the first mover advantage.