India markets weekahead: Await breakout or breakdown

October 23, 2011

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

It was a volatile trading week with lots of stock-specific action driving Indian markets. Jittery world markets, earnings disappointments from front-line companies and a weakening rupee erased gains registered early in the week.

Results season has been a mixed set with more negative surprises. Hero MotoCorp, HDFC Bank and Infosys were some prominent bright spots, while TCS, HCL Tech, L&T, JSW Steel, Crompton Greaves and Idea Cellular disappointed.

Reliance also reacted as the stock had run up before the results. On the positive side, the strike at Maruti’s Manesar plant has finally ended and hopefully this should be a long-term solution.

The rupee crossed the psychological 50-mark last week as high inflation and slower growth prospects are prompting a shift to dollars. The steady rise in the dollar is bound to compound the problems of our economy. Imports, especially oil, have become costlier while exporters are also unable to maximise gains as global recession puts them in a weak spot as order inflow slows.

Inflation which is already above the RBI’s comfort levels will face further pressure given that the country imports about 80 pct of its crude oil requirement. Given the seriousness of the situation, RBI intervention is expected.

The upcoming monetary policy review on October 25 is expected to be a litmus test for the central bank. With the current conditions, it is more likely to raise rates by 25 basis points, hopefully for the last time. This would be the 13th rate rise since March 2010 for the Reserve Bank of India. The policy action so far has managed to crimp big-ticket spending on auto and housing. More worryingly, the capex that India Inc needs to fulfil for its double-digit growth ambition has been curbed by a slowdown in project approvals.

The coming week would be action-packed but truncated due to Diwali holidays. There will be a special muhurat trading session on October 26, which is only a symbolic trading session for retail investors and is never a trend setter.

Markets are expected to remain volatile until there are some signs the EU is finally getting its debt crisis under control. The U.S. and European markets closed on an upbeat note on optimism about the EU summit over the weekend. With one more summit scheduled for Wednesday, investors are taking the optimistic view a resolution will soon be reached. Among the ideas the EU will likely examine is one along the lines of a “bad bank”, a device authorities can create to buy up toxic debt and ease liquidity conditions.

Among other cues for this week, we have derivative contract expiry coming up on Thursday and a host of prominent results — ITC, Sterlite Industries, Titan, NTPC, Kotak Mahindra Bank, Dr Reddy’s Lab, Maruti Suzuki and LIC Housing Finance.

We would continue to be in a range this week which could narrow going ahead preparing the stage for a breakout (or breakdown). With most of the adverse news flows already discounted and the doomsday theory firmly entrenched in the psyche of investors, any light visible at the end of the tunnel could change the tide before most of us realise it. Alternatively, any major negative news flow could bring in a sense of capitulation and result in a breakdown. In short, the days of range-bound movement would come to an end and we should see a decisive trend either way in the following weeks.

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