No domestic cues; look for Fed meeting

June 18, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The Nifty is close to critical levels ending 2.2 pct down after holding at higher levels for a long time. Interestingly, mid-caps and small-caps are quietly outperforming the benchmark indices which clearly suggest that a few large-cap stocks like Reliance Industries are pulling it down.

Needless to say, the overall market sentiments were extremely weak led by a triple whammy triggered by negative news flows which led to heavy selling by FII over the past few trading sessions.

Firstly, the Reserve Bank of India (RBI) raised its key lending rate by 25 basis points to 7.5 pct to tame inflation and said the monetary policy stance remains firmly anti-inflationary. The market fears further rate hikes but we believe this could be the end of the rate hike cycle as we expect the commodities, especially oil and food prices, to correct.

Secondly, the negative news flow surrounding index heavyweight Reliance Industries resulted in the stock declining by 7 pct during the week. There were news reports that the Comptroller and Auditor General of India (CAG) accused the oil ministry of favouring the firm by allowing it to double the development cost of its KG-D6 gas field.

This helped to build up further stress in the counter which was already reeling. Clearly this major contributor in the index is likely to act as a barrier in any upward move in the foreseeable short term. We are keenly watching this development and its consequences on the proposed BP deal.

Thirdly, on the global front, the euro zone debt crisis troubled the global markets on fears of a possible Greek debt default. However, the silver lining is that Greece’s debt crisis has helped pushed global commodity prices lower, which may ease high input costs concerns for India Inc.

Although the Maruti plant strike at Manesar has finally come to an end, the woes of the auto sector continue due to faltering demand. On the macro front, crude oil prices dropped to its lowest in four months by close to 7 pct. This decline will help ease concerns about the government’s finances and could be a trigger going ahead.

For the coming week, the focus is clearly on the global arena for cues back home. The Federal Reserve holds its next policy meeting on June 21 and 22. QE2 which was designed to increase the money supply, keep interest rates low and stimulate the economy ends on June 30. The post QE2 scenario is still an area of speculation and would be the deciding factor for market movement in the short to medium term.

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