The Bombay Sensex, the stock market index for the Indian Stock Exchange, has seen a brutal shake up as the index has lost almost 12% in the last couple of months. Does this mean a bear market is about to take hold of the Sensex? Or is this just a minor correction, a much needed break in prices and perhaps even a time to load up on stocks in this emerging, powerful economy?

The Indian economy has seen stellar growth over the last five years, and has done quite well when seen over the last fifteen years or so. All this growth and the advent of the Internet has begun bringing the over 1 billion people of the subcontinent into the world economy. As the purchasing power of the population has grown, it has attracted the attention of the best companies from around the world looking for opportunities to grow their revenues and profits. This in turn has further increased available jobs for the local population and thus has set a virtuous cycle in motion.

None of these factors are disappearing, nor is the hunger for success and the will and hard work of these people, who have finally broken through onto the world stage, going away. This should help keep the recent stock market declines in perspective. The Bombay Stock Exchange index has seen a sharp rise over the last 3-4 years with several mutual funds showing 100%+ rise in the last year or two. When a mutual fund starts doubling in a year - that means the market has gone too far too fast - and a a. That is exactly what we are seeing in the Indian market.

But even as a stock market begins contracting, it does put some brakes on the growth at the edge of the economy. Companies tend to delay projects, waiting for the markets to stabilize, and the wealth effect amongst stock holders declines as well. Fortunately, in India, stock ownership is not very widespread, and thus the average consumer is not unduly affected by the decline, which implies that consumer demand tends to remain stable - and that encourages ongoing investments from companies.

Having said that, the greater integration of India into the global trade means it will be affected by the economies of China, Europe and the US more than ever before - and thus it will either lead or track worldwide stock market declines/rise.

While no one can say for sure whether the current market decline in India will turn into a full-scale bear market, one can be sure that the underlying fundamentals of the economy remain strong, and the markets will follow through once the weak hands have been shaken off, and some of the froth has been removed from the market.