India markets weekahead: New range for markets but scepticism abounds

October 29, 2011

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

Markets finally came out of the range last week with the Nifty breaking the 5200/5250 resistance after a positive outcome to the long-awaited plan to resolve the European debt crisis. The plans included a ‘haircut’ of 50 pct on Greek debt, an increase to the size of the European Financial Stability Facility (EFSF), and a 9 pct core capital threshold for European banks.

The sentiments got a further boost after the Reserve Bank of India in its half-yearly review of monetary policy stated that the likelihood of a rate action in the December mid-quarter review is relatively low. Last week, it raised rates by 25 basis points as expected. U.S. GDP data and unemployment figures were encouraging enough for world markets to continue the rally.

The rupee found support near the 50 mark against the dollar as there was a sharp improvement in risk appetite following the EU summit. Fresh demand for rupee emerged which resulted in it advancing to 48.75 against the dollar. There will be scope for further recovery as risk appetite improves and I expect the rupee to be back in the 45/46 range in the next 3-4 months.

For the coming week, stock specific activity is expected as a set of prominent results is due. We have ICICI Bank, Hindustan Unilever, Wipro, BPCL, HPCL, cement majors Ambuja Cement and ACC, Ashok Leyland, TVS Motors, Jubilant Foodworks, SAIL and ONGC. We also have automobile and cement companies coming out with their monthly sales and dispatched figures.

Over the weekend, Maruti came out with its Q2 results. Net profit saw a drastic fall of 60 pct yoy to 2.4 bln rupees as its output was hit on account of a labour strike at its Manesar plant. Revenues also declined by 17.6 pct. The results are below market expectations and we could see some more pullback for the stock.

After surprising analysts for the last few quarters, Jubilant Foodworks could be a case where the expectation bar moves up to a breaking point. And with fresh competition brewing in the space with Bharti tying up with Pizza Express in addition to Pizza Hut’s expansion drive, could mean pressure on margins for Jubilant going ahead.

Globally, the focus will be on G20 leaders meeting in Cannes on Thursday and Friday. The euro zone leaders are now under pressure to finalise details of their plan to slash Greece’s debt and strengthen the EFSF. Basically no one has a choice but to play along to avoid an immediate crisis.

As mentioned in the previous column, the make or break event for the markets last week has taken the Nifty out of the critical trading band of 4700-5200 which it held on to for almost three months. Renewed buying interest by foreign funds in the cash market and appreciating rupee will reinvigorate Nifty to touch 5550-5600 levels quite soon. As liquidity is waiting on the sidelines for direction, we could see a very quick rally which would feed on itself — liquidity chases a market which gives good returns and the market gives good returns because liquidity is chasing it.

Nifty falling back to the earlier trading range does not seem a possibility now as most of the uncertainties relating to local and global markets have been addressed to a certain extent. Overall, the markets seem to be well poised for now and it will be safe to assume that a base has been created for a bull run from here on but beware — it will not be a smooth one.

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