India Market Weekahead – Policy action, rupee to decide market direction

By Ambareesh Baliga
May 27, 2012

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

The week gone by displayed indecisiveness by participants as the markets garnered small gains after moving in a tight range. The Nifty managed to hold on to the 4900 level mark as investors cheered the government’s announcement to raise petrol prices in an attempt to revive the policy inaction tag.

State-run oil marketing firms took the long overdue step of raising petrol prices by 7.50 rupees per litre — the steepest ever increase in retail prices. The revision comes as the rupee hit an all-time low against the dollar leading to a jump in the oil import bill. As expected, the government faces strong protests by the opposition and a partial rollback could be on the cards in the next few days. This could also delay the decision on the increase in retail prices of diesel and LPG which form a lion’s share of the subsidy bill and is one of the important signals about the seriousness of the government to pull through bold and tough measures.

The rupee slid further during the week and crossed 56 a dollar. Token measures by the Reserve Bank of India (RBI) in the form of 50 percent conversion of exporters’ dollar holdings into rupee provided some respite. Given the short-term risk conditions, the rupee will remain generally on the defensive and a rally beyond 52-53 does not seem likely in the near-term.

The coming week may see heightened volatility as the derivatives contracts are set to expire on Thursday. The announcement of January- March 2012 quarter gross domestic product (GDP) data on Friday will provide an important indicator of the health of the economy but again the expectation is tempered. The Indian economy expanded 6.1 percent in the October-December 2011 quarter from a year earlier, the weakest pace of expansion in more than two years, hurt by slower growth in manufacturing output and a contraction in mining production. With current account and fiscal deficit along with weak investment climate playing a spoilsport, the GDP scare has intensified further.

HSBC’s monthly purchasing managers’ index (PMI), which indicates the health of the manufacturing sector, is likely to be released some time this week. The HSBC India PMI rose to 54.9 in April from 54.7 in March.

Automobile and cement shares will be in focus as companies from these two sectors will start unveiling monthly sales volume data for May 2012 from Friday. After a fall in April 2012 sales, demand continues to remain weak in May. Pessimism is expected to increase after the recent hike in fuel prices. May is a seasonally muted month for car makers and inventory levels are also expected to be high.

The Q4 March 2012 earnings season is drawing towards a close. Some of the prominent results this week are Coal India, Tata Motors, ONGC, Steel Authority of India, Power Grid, Sun Pharma, GAIL, DLF, Mahindra & Mahindra and Jaiprakash Associates.

Looking for cues globally, the U.S. stock market will be closed on Monday for the Memorial Day holiday. Major releases in the U.S. include consumer confidence, gross domestic product and the May non-farm payrolls report, which could provide vital clues on the economy. The Europe overhang continues with a looming possibility of Greece exit from the euro zone.

The Nifty trend in the coming week appears to be bullish and a rally to 5000/5050 appears likely, however it doesn’t signal a reversal of the downtrend which began from 5630. As mentioned in the last column, investors with a time objective of more than a year should not wait for a bottom to be confirmed and use the opportunity to build position in fundamentally sound stocks which have high risk-reward ratio. Markets are purely dependent on the currency movement and any further fall to 58 to 60 could puncture the current bounceback.

On the flip side, in case we see further policy action from the government and the rupee bounces back to 53/54 levels we could see renewed FII buying as the valuations are extremely attractive and the depreciated rupee is an icing on the cake. The current uncertainty on the rupee is keeping the FIIs away for the time being. Hence, keep a watch on government policy action and the currency for direction in the equity markets.

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RBI just crashed all hopes. However the rates will come down over the nex few monthsï»ż given the sluggish growth and lower credit offtake.
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