India Market Weekahead: Re-test of earlier lows expected
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Initial optimism over the resignation of Italian Prime Minister Berlusconi faded quickly and there was further intensification of euro zone fear during the week. The Indian markets underperformed immensely vis-à-vis its global peers with a deep cut of 5 pct during the week. The sharp pangs of distressing high inflation, weaker rupee, disappointing corporate results and FII selling pushed the markets back to its earlier range of 4700 – 5200.
Further pressure was witnessed in the rupee which dipped to test 52 levels against the dollar — the weakest since March 2009. Risk conditions on the global front continued to be negative in addition to lack of foreign fund flows in the stock market. Raising of foreign investment limits into India did not have any impact on the currency market as this measure would have worked only if there was FII interest in India. The Reserve Bank of India also appeared to be very cautious over intervening to support the rupee. Going forward, the trends will continue to be influenced by risk appetite.
Indian corporates have suffered huge forex losses in the September quarter due to rupee depreciation. With the short-term outlook for rupee remaining subdued, further forex loss in the coming quarter for these corporates cannot be ruled out.
Markets plagued by policy inaction have some reason to cheer. The Cabinet decided to take up a proposal on allowing FDI in multi-brand retail besides considering increasing the FDI limit in single brand retail from 51 pct to 100 pct in the coming week. Retailers like Pantaloon and Trent will benefit as these companies currently have or are in the final stages of tie-ups with global retailers eagerly waiting to enter India.
On Friday, we also saw the government putting some highway, power projects and the Hyderabad Metro on fast-track indicating they are trying to kick-start the economy by breaking the log jam.
Markets this week will continue to be highly volatile on account of derivative contract expiry this Thursday. Aviation shares are likely to be in action on reports the Cabinet will soon discuss FDI to include foreign airlines investment, a move that will help cash-strapped and debt-laden loss making Indian carriers to raise money. Kingfisher Airlines shares have already faced the wrath of investors on reports of a possible bankruptcy.
With the ongoing pessimism, a re-test of the earlier bottom of 4700 – 4730 seems to be logical for Nifty, though a minor bounce back cannot be ruled out initially as the fall last week has been quite steep. Markets had tried hard to break the 4700 – 5200 range. Just when it seemed that Nifty had entered a new range (5200 – 5600), the outbreak of further pessimism on the euro zone front pushed Nifty quickly to the earlier range. Now it is very critical for Nifty to hold on to 4700 levels as psychologically, bears have an upper hand.
But, not to forget, it is that time of the year when funds indulge in window-dressing to improve NAVs. This can boost the markets momentarily in the short-term. Also, one cannot ignore the fact that consistently high negative real interest rates due to high inflation make stocks attractive over the longer term.
The Indian markets are an attractive destination over the longer term though marred by a few short-term hiccups. Those willing to take risk coupled with patience can reap healthy returns. Remember, it’s next to impossible to catch the bottom.