Get set for an action-packed week

July 22, 2012

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

Markets continued to display weakness during the week except for a spirited, though limited, rally on July 18 after the UPA convinced belligerent ally Mamata Banerjee to fall in line for the presidential elections. The Nifty lost 0.4 pct to close the week at 5205 on political worries after the NCP, another government ally, expressed dissatisfaction with its functioning.

International markets were volatile due to encouraging earnings from U.S. companies on one hand and the deepening Euro crisis on the other. Though a bailout has been approved for Spanish banks, yields on bonds continue to rise and is a cause for worry. The rupee was range-bound and closed at 55.32 rupees.

The week was low on data points, with only inflation and a few corporate results being declared. Inflation at 7.25 pct was a tad lower than expectations but these figures may get revised upwards in the next few weeks. Axis Bank surprised on the bottom line but analysts are worried about rising NPAs, thus it closed flat for the week. Bajaj Auto had a huge short build-up prior to the results as market men were expecting a pathetic set of numbers. A surprise from the two-wheeler major forced short-sellers to cover their positions leading to a 11 pct rally from the week’s low point. Reliance Industries reported its results after market hours on Friday, which were slightly higher than market expectations on the back of robust refining margins. The profits would have been higher but for lower-than-expected petrochemical margins which limited gains. The stock may hold ground at current levels due to buyback support from the company.

Monsoons failed to pick up last week resulting in about 22 pct deficiency. The hard-hit states of Maharashtra and Karnataka may look at the centre for drought relief measures in the next few weeks. Despite a poor monsoon, India may not be in a distraught state due to the bumper crop we had the previous year. The troubled pockets would be oilseeds and coarse cereals which could have a marginal impact on food inflation.

The government announced the imposition of 21 pct anti-dumping duty on power equipment but this failed to enthuse the capital goods sector as the Chinese equipment manufacturers still seem to enjoy a 10 pct price advantage despite this duty. The banking sector saw a further correction when a RBI committee recommended the tightening of regulations for loan restructuring, resulting in higher provisioning going ahead. This has come at a time when a number of large corporates are lining up for debt restructuring. The Empowered Group of Ministers (EGoM) on telecom has agreed to cut the minimum price for 2G spectrum by 15 pct to 140 – 160 billion rupees and accepted TRAI’s recommendation of staggered payment. This along with the mortgage of airwaves meets the demands of most telecom companies.

The shocking incident of the week was the brutal murder of a Maruti official during the unrest at their Manesar Plant. In October 2011, it was expected that they have arrived at a long-term solution with the labour union but this incident has proved otherwise and is bound to keep the pressure on Maruti for a while. The plant has since been shut. Though the management has put up a brave face in denying proposals to shift the facility out of Manesar, I doubt they would be able to get back on track soon, looking at the history of volatile industrial relations at that location. Maruti shares plunged more than 10 pct before recovering to close about 6 pct lower. If the imbroglio continues for the next few weeks, we could see the stock at a 52-week low soon.

The coming week is expected to be a policy-packed one with a diesel price hike and a concrete announcement on FDI, especially in aviation and multi-brand retail. Subject to policy action, we could expect the RBI governor to act on easing rates on July 31. It is important that the government sends out signals marking the end of policy inaction as there may not be too many excuses to delay it further. As I have been indicating for some time, this could be a make-or-break week for the Indian stock market, which has perched itself at current levels hoping for clarity on the path ahead.

I still believe that Manmohan Singh is capable of implementing actions to put the Indian economy back on track and the “TINA” (there is no alternative) factor will allow him to see it through. As investors, we need to keep our ears close to the ground and don’t hesitate to be the proverbial rat if you get the sinking feeling. After all, it’s your hard-earned money and you need to protect it.

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