India Market Weekahead: Testing times but patience to be rewarded

By Ambareesh Baliga
December 17, 2011

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

Key indices witnessed a deep cut this week with the Nifty falling below the psychologically important support level of 4700 for the first time since November 2009. Experts have begun predicting a crash and rightly so, as all the levers of the economy have gone for a toss with pessimistic news flows. So the moot question is whether the market has discounted all the negatives? If yes, then why are Indian markets underperforming global counterparts week after week?

India, since the beginning of the financial turmoil in 2008, has been considered the economy which could probably be least affected as it is mainly driven by domestic consumption. Even six months back, the rupee had appreciated and remained strong, commodity prices were on a correction mode and inflation was expected to come down after the monsoon. We had a great opportunity in the global economic adversity but we lost that and much more.

First and foremost, government inaction on various reforms and policy decisions followed by scams and scandals resulted in further paralysis of corporate India. Business sentiment took a battering and it was natural once we got into the downward spiral, negatives such as inflation, depreciating currency and fiscal deficit starting feeding on itself.

Benchmark indices have hit multi-year lows and shares of dozens of blue-chip companies are now available at substantially lower valuations than in 2008. There are companies available below their stripped down value too. But very few investors have the courage, conviction and money to buy these beaten-down quality stocks during the current mayhem.

Those who have the conviction to invest money may reap huge returns. They should also be willing to bear the pain for the next few months and have courage to buy more at lower levels if the market or the specific stock corrects further. For others, it’s a time to stay out and wait for the fresh rally to begin before venturing out.

Focusing on key events during the week and cues for the coming one, the markets have witnessed a lot of volatility. The much awaited mid-quarter monetary policy review was a damp squib as the RBI left its main lending rate unchanged in its attempt to support dwindling economic growth as inflation shows signs of cooling. The RBI also refrained from cutting the cash reserve ratio (CRR) despite tight liquidity in the system as this may have affected the rupee adversely. However, the key takeaway of the policy review was that further rate hikes may not be warranted and monetary policy is likely to reverse the cycle soon.

Rupee movement has been in focus in recent times as no other Asian currency has depreciated against the dollar as much as the rupee. The RBI finally stepped in and imposed restrictions on forward trading in the local currency by FIIs and traders and capped banks exposure to the forex market. This seems to have provided a ray of hope for the currency though such an action should have been taken much earlier. A section of the market feels the RBI’s hands-off approach to the rupee movement helped speculators have a field day.

The coming week would be a non-event in terms of any economic or global news flow expectations. Market players will be eyeing the December quarter results which will see a number of downward revisions, especially those having foreign currency borrowing. With Nifty breaking below the long-standing range of 4700-5200 convincingly, the next logical level in sight seems to be 4200 in the near-term. However, markets could see some momentary pullback after the sharp cut witnessed last week.

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