India Market Weekahead: Economic data to provide cues

December 11, 2011

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

After a sharp bounceback last week, Indian markets were not able to hold on to the gains and corrected by 3.7 pct during the week. The overall tone remained bearish on domestic concerns revolving around the government’s inability to push through key reforms and uncertainty over the Euro debt crisis and over the outcome of the European Union (EU) summit.

Selling aggravated after the government lowered its Gross Domestic Product (GDP) growth forecast to 7.25 pct from the previous 8 pct for the current year (2011-2012) and also warned of fiscal slippages.

The euro zone crisis has been the central story of the year. The much talked about EU summit concluded with agreement among 23 of the 27 EU members to maintain tougher fiscal rules, though the UK disagreed. They have committed to fiscal austerity and agreed that sanctions against them will automatically apply if their budget deficit exceeds 3 pct. They have decided to add to the resources of the International Monetary Fund (IMF) by an additional 200 billion euros to lend to distressed European sovereigns. They also decided to accelerate the European Stability Mechanism (ESM) which has a pool of 500 billion euros which can be lent to distressed banks and sovereigns.

The expectations from the summit had been toned down by market participants and the outcome has more or less met the revised expectations.  Some of the concerns highlighted are that the 200 billion euro loan to the IMF seems insignificant in size and markets are seeing this as an initial tranche with more expected to come.

U.S. indices ended upbeat as investors appeared to show relief after the euro zone’s latest plan to solve its debt crisis. Indian markets might also see an initial reaction to the outcome of this summit and indices may open positive on Monday with the data on Industrial production (IIP) for October providing direction for the day.

Markets have already discounted weak numbers after newspaper reports last week suggested that the industrial output declined by 7 pct.

Data on headline inflation for November is expected on Wednesday which will provide cues on the RBI’s likely policy stance at its mid-quarter monetary policy review on Friday. The markets have discounted a cut in the cash reserve ratio (CRR) on tighter liquidity conditions. However, the RBI is expected to press the pause button after raising rates 13 times in the last 20 months.

We also have the third advance tax instalment figures being declared by corporates on Thursday, which is expected to provide cues on December quarter corporate earnings and again we don’t expect any positive cues.

The coming week promises to be the busiest for the U.S. markets before the year ends. The Fed meets Tuesday though it is not expected to take any action; November’s retail sales data is also due on Tuesday. We have weekly jobless claims data coming up on Thursday and producer and consumer inflation data Thursday and Friday.

Closer home, we have a trailer to Anna’s agitation on Sunday and subsequently the threat of an indefinite fast from December 27, which will probably decide the speed of implementation of the Lokpal bill. The corporate honchos have been vocal about the government’s inability to move ahead and their concern on the business environment.

Microsoft too has issued a statement that India is no longer the favoured destination for MNCs. The energies of the ruling party seem be more focused on the upcoming Uttar Pradesh elections and trouble-shooting. Hence, the reforms limbo is expected to continue except for the Lokpal bill which could be passed under pressure.

Thus, the coming week will witness lots of volatility with markets reacting to various releases. The Nifty is currently at the lower end of the 4700- 5200 band and a bounceback after last week’s fall could be on the cards, but it would difficult to find too many market participants.

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