India Markets Weekahead: World stocks, RBI policy expectation to dictate trend

September 3, 2011

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

As indicated in the previous week’s column, Nifty respected support levels of 4750/4800 and rebounded to 5000+ levels in a truncated yet action-packed week.

A few heavyweights like Reliance Industries and SBI witnessed bargain hunting while some beaten down sectors like metals and banks saw buying interest. The automobile sector accelerated as expected in reaction to better monthly sales and an expected pick-up in sales on account of the upcoming festive season.

On the macro front, there were enough indications that the Reserve Bank of India (RBI) may not be done with the rate hike cycle as yet.

On one hand, the food inflation firmed up to 10.05 percent, while on the other hand, India’s GDP grew 7.7 percent in the June quarter, which was in line with expectations but much slower than last year. It is perceived that RBI may announce yet another 25 basis point rate hike due to continued high inflation when it undertakes the mid-quarter policy review on September 16.

Meanwhile, the much awaited U.S. employment report was released on Friday and U.S. stocks dropped as employers added no new jobs in August.

However, markets across the globe already had discounted the weak U.S. job numbers as stock indices in Europe and Asia fell between 1-3 percent, except for Indian indices which remained firm. So needless to mention, the Indian market may trade weak when it opens for trading on Monday.

There are not many international data points to be looked at next week. The only important event would be the Bank of England (BoE) and ECB interest rate decision on Thursday. The BoE is expected to keep interest rates at extremely low levels and there is speculation over a more dovish ECB policy.

The coming week is going to be a consolidation period for the Indian market as it braces itself for the upcoming RBI policy review on September 16. The underlying risk appetite remained fragile, as demonstrated by the fact that there were net outflows of foreign funds of $2.3 billion in August, the heaviest outflow since Q4 2008.

Though valuations are reasonable at current levels, it remains to be seen whether the rally sustains in the coming week given the pressure points like high inflation and slowing economic growth along with various challenges coming up from the global front.

We might thus see some amount of profit booking emerging at 5100/5200 levels in the Nifty which is likely to take it to sub-5000 levels. The risk of Nifty breaking 4750/4800 support still remains and for the market to sustain above 5200 mark requires positive news flow which seems to be difficult to come by considering the current global economic conditions.

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