India Market Weekahead: Book out partially to play safe

June 10, 2012

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

After a sell-off in May, the mood has turned upbeat so far in June with benchmark indices hitting a one-month high against our expectation last week that the markets could remain subdued.

Sound bites from Reserve Bank of India deputy governor Subir Gokarn indicating a rate cut and Prime Minister Manmohan Singh’s intent on ambitious infrastructure development for the current fiscal were among the primary reasons for our buoyant market. For the week, key indices gained 4.7 pct.

There was heightened action on the global front too. The Australian and Chinese central banks cut rates. There were a set of dismal economic reports from the euro zone and yet another downgrade for Spain. The European Central Bank kept rates steady at 1 pct dashing some market expectations that it might move quickly to combat fears about the health of the euro zone.

The Chinese central bank cut interest rates after four years. The rate cut by China is positive for metal stocks back home. Fed chairman Ben Bernanke gave no clues about whether the Fed will give further stimulus for the U.S. economy when the Federal Open Market Committee meets June 19-20.

A number of times in the past three years we have seen intent from the Indian government never getting implemented due to political compulsions. I believe that if the Congress seriously plans to claim its stake during the 2014 elections, it has to put its act in place now. The best way would be to kick-start the infrastructure sector as that would be the biggest employment generator and could support the sagging economy.

An announcement to this effect has been made but the question is whether they would be able to pull it off. One of the biggest challenges would be to get investors interested in the India story again and that would be an uphill task as the investment environment for the foreign investors has been vitiated in the last few months. Corrective measures need to be implemented including reversal of anti-investor steps taken recently. FDI in aviation and retail is back in the reckoning and pushing it through will signal an end to policy paralysis.

Unexpectedly, oil has come to the rescue by correcting sharply and remaining weak. We have seen in the past few years that infrastructural development and a vibrant local economy has played a major role in the state elections and I assume the incumbent government understands this well.

The rupee finally gained some strength and crawled below the 55 a dollar level during the week on the back of firm equity markets, inflows from custodian banks and strong global cues, though it finally ended at 55.42.

Indian markets are headed for a volatile month, featuring elections in Greece and a Federal Reserve meeting among key global events, as well as inflation and IIP data and a critical RBI policy meeting at home. Thus, the rupee is expected to be volatile tracking mixed global fundamentals.

The Nifty has managed to inch back to its 200 DMA and looking at the sharp recovery, it seems that the market is closely watching big events that will happen in the next couple of weeks.

Data on industrial production (IIP) for April is due on June 12 and inflation for May is due on June 14 which will provide cues on the RBI’s likely policy stance at its mid-quarter monetary policy review on the June 18. IIP registered a surprise 3.5 pct contraction in March 2012. The annual rate of inflation, based on monthly wholesale price index (WPI), stood at 7.23 pct for April 2012.

The rally last week has discounted a 25 bps rate cut and the intent on infrastructure spend announced by the PM. Needless to say, it could spell doomsday if the RBI feels that the rupee is a bigger priority given our huge external deficit situation and maintains status quo.

First instalment of the advance tax payment is due on June 15 which could provide a reality check on Q1FY13 corporate earnings and the health of the corporates as most participants are expecting that the earnings downgrade cycle is over. In addition, the monsoon data will be closely watched as we get concrete progress and forecast by the last week of June.

Globally, all eyes are on the Greece election on June 17 as the Greek voters return to the polls after the splintered results of a May 6 parliamentary election which left no party able to put together a government.

In a nutshell, markets locally and across the world are headed for heightened volatility ahead of key trend determining events. The upside for the Nifty in the very near term will be capped around the current levels of 5050-5100 as most of the positives seem to be priced in. It requires a huge dose of positive news to cross this hump for the next target of 5350-5400.

Conversely, any disappointment on the policy or the global front may take the Nifty back to recent lows. Time to book out partially and play safe.

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