India markets weekahead: U.S. debt ceiling deadline key

July 30, 2011

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

The RBI surprised the street with a larger than expected 50 basis point rate hike in repo and reverse repo rates. The sideways and undecided trend was finally busted and the Nifty broke the crucial support of 5500 during the week as worries of rising interest cost hurt corporate profits.

The street was further spooked by RBI governor’s comments that inflation has been higher than expected and has not seen any signs of moderation despite softening of commodity prices with various upside risks persisting. This clearly puts an end to the belief by a section of the market, including myself, that we might be near the end of monetary tightening as any change in stance of RBI will be motivated only by signs of a sustainable downturn in inflation.

The obvious resultant fall-out of the policy was a weakness seen in interest rate sensitive sectors like banking, auto and reality. To add to woes, some of the June quarter results declared during the week were not up to the mark. BHEL came out with disappointing results, as did ONGC and HUL. Reliance Industries’ petro chem margins were lower than expected. ITC and ICICI Bank in contrast declared a good set of numbers.

Another key development during the week was the change in takeover code by SEBI. It has raised the mandatory open offer size to 26 pct from 20 pct and the trigger point for the same raised to 25 pct.  This change is expected to benefit promoters as they can raise more money from private equity players which is likely to take up private equity investments in listed firms.

The coming week has a few key results such as CIpla, Bharti Airtel, Ranbaxy, DLF and Indian Hotels. The week will also witness release of monthly data of automobile and cement companies for July 2011. These numbers could further dampen sentiment in these sectors.

The monsoon session of parliament begins on Monday and will continue up to September 8. Some key bills are set to be introduced in the monsoon session of the parliament. It’s expected that Lokpal Bill and the 2G scam would take the center stage.

However, a lot depends on the outcome of the August 2 deadline in the United States to raise its $14.3 trillion debt limit. A failure to reach an agreement will mean the Treasury might be unable to meet its obligations which could mean a downgrade of U.S. debt and a looming U.S. default which could have a cascading effect.

Though most believe that a solution is imminent, the longer term downgrade too seems a foregone conclusion. The question is whether this would lead to liquidity flows to emerging economies after a brief period of risk aversion. This holds the key to the Indian markets.

The Nifty has a support around 5350-5400 levels and resistance in the region of 5600/5650. Hence, we are expected to be range bound unless the U.S. situation warrants a huge world markets correction.

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