India Markets Weekahead: Long-term investors should wait, clarity on GAAR eyed

April 1, 2012

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

After five weeks of negative close, Nifty managed to show some respite to end with gains of 0.7 pct for the week. Comments from the Finance Minister that participatory note (P-note) holders will have no tax liability in India, aided the rally.

Earlier during the week, markets feared that the adoption of the new tax norms viz. the General Anti-Avoidance Rules (GAAR), which comes into effect from April 1, could affect FII investments through the Mauritius tax haven and through P-note route which form the lion’s share of the institutional flows.

The government announced borrowing calendar of Rs 3.70 trillion for H1FY12-13 which is 65% of the total gross borrowing of Rs 5.7 tn. While the ongoing tight liquidity still remains a concern, RBI’s support in the form of open market operations (OMOs) in H1FY12-13 may provide some relief in yields movement. We expect the 10-year benchmark bond yields to cross the 9 pct mark when the fresh supply starts rolling in.

Going forward, RBI monetary policy in April will be keenly watched as it would decide the further direction of bond yields.

Oil prices saw a minor correction due to the higher than expected inventory levels. Domestic Oil companies have been threatening to increase retail petrol price but are awaiting a nod from the government. No doubt the subsidy burden is ballooning.

For the coming week, the rupee is likely to remain weak, undermined by oil prices and doubts over capital inflows, especially when the risk appetite is weak.

The coming week is a truncated one as markets will remain closed on Thursday and Friday. Automobile and cement shares will be in focus as companies from these two sectors start unveiling monthly sales volume data for March 2012. On Monday, the HSBC’s monthly purchasing managers’ index (PMI) is likely to be released. HSBC’s monthly Business Activity Index, which indicates the health of the services sector, is also due next week.

After the best first quarter in 14 years, the U.S markets may be poised for a pullback as investors look to a slew of economic data for insight on the strength of the domestic economy. Economic indicators next week include data on manufacturing and services as well as several reports on the labour market. On Tuesday, Bank of England interest rate decision and ECB interest rate decision are due to be announced.

Back home, the next major trigger for the markets will be the Q4 earnings season which will kick start with Infosys results on April 13. With market expectation already low, there is a remote possibility that the companies may surprise on the positive side.

This quarter is extremely important as it will set up a base for FY13 growth. Also, the investors will closely watch for
clarifications from the government on GAAR.

The Nifty once again managed to bounce back to the 5,200-5,500 range after briefly breaking the support levels of 5,160 which is the 200-DMA. However, further gains from hereon will primarily be determined by further clarification from the government on GAAR and surprises from the results season.

The expectation from the monetary policy too seems be low but any rate cut will provide a big booster for the markets. Long-term investors waiting to deploy fresh money should wait for a better entry point near 5,000 levels.

Traders and momentum investors should adopt the strategy of buying near the lower end of the range and booking out at the higher end of this range as it will be a range bound markets for a while.

A sustainable rally may be seen post the June-quarter results setting the trend for FY13.

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