India Market Weekahead: Brace for volatility within a range

March 25, 2012

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

It was a topsy-turvy week for markets as the benchmark indices hovered between positive and negative territory to finally end with a loss of 0.7 percent. A lacklustre budget initially triggered the weakness followed by a spate of negative events resulting in a fifth consecutive week of decline for the markets. The newly appointed railway minister’s move to roll back fares also unnerved investors.

A leaked draft report of the Comptroller and Auditor General (CAG) revealed that between 2004 and 2009, the government gave away 155 coal acreages to private and public companies without a proper auctioning process. It is estimated that due to this, the government exchequer lost about $210 bln. The CAG later quashed reports of losses from the government’s coal block allocations policy. However, the already dwindling faith of investors in the current government got another jolt in the wake of numerous other scams that rocked the nation in the past.

The rupee weakened against the dollar beyond 51.30 as confidence in the global economy deteriorated again following weaker-than-expected Chinese and euro zone data. Weakness in equity markets and a strong dollar demand from oil importers kept the currency weak. With risk appetite on the weaker side due to doubts over capital inflows, the rupee is likely to remain under pressure, undermined by high oil prices. The global economic outlook will remain an important market focus. Any further evidence of deterioration in the Chinese and the euro zone outlook would result in a defensive stance on risk appetite with a shift into instruments such as the yen and dollar.

Ben Bernanke’s statement that the U.S. economy lacks the strength to sustain gains is another negative news item for the markets. The rupee may continue to remain weak over the next few weeks.

After dilly-dallying with the prospects of deregulation in petrol prices, the prime minister again hinted at a possible increase in petrol prices. Oil marketing companies (OMC) will be in the spotlight this week but without definite action from the government, their fate remains uncertain. ONGC, on the other hand, may hold its ground due to increased weightage in the MSCI EM Index.

The drama on the political front continued with the Samajwadi Party categorically stating its intention not to join the Congress-led UPA at the centre, emboldened by their thumping victory in Uttar Pradesh. There was a growing fear of a mid-term poll but issue-based support by both the Samajwadi Party and the Bahujan Samaj Party has allayed these fears to an extent. As long as there are no bigger scams unfolding and India Inc is allowed to function without any retrograde measures by the government, the markets may continue to attract global liquidity due to the relative growth differential.

For the coming week, the markets are expected to remain volatile as derivative contracts expire on Thursday. The next major trigger for the markets will be Q4 FY12 earnings beginning in the second week of April. Expectations are low as the last instalment of the advance tax payout of top Indian firms was largely flat, which indicates that revenues and profits of companies are under stress in line with December quarter results.

On the macro front, the government is scheduled to announce its market borrowing calendar for the first half of FY13. The data on Balance of Payment (BoP) for the quarter ending in December is due on Friday. Other macro data points such as on external debt for December-end and on consumer price index of industrial workers is also due on Friday.

Global market cues will be closely watched as the U.S. markets seem to be over-bought and may be ripe for a pullback. U.S. Consumer Confidence data which will be out on Tuesday is another macro data point to be watched.

As expected, the Nifty hovered close to 5200 levels and respected the 200-DMA of 5160 which is being widely followed by a wide section of market participants. In case these levels are broken, we could see levels of 5000-5050 in the coming days. Broadly, the Nifty is expected to remain in the range of 5000-5450 with a negative bias.

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