India Markets Weekahead: Prudent to wait for the budget

February 23, 2013

(Any opinions expressed here are those of the author, and not necessarily of Thomson Reuters)

After showing promise early in the week, the markets turned gloomy on Thursday with a sharp correction, ending the week with a 0.63 percent fall at 5850 – close to the support levels of 5840 which hasn’t been violated on a closing basis.

FII buying dipped considerably during the week, estimated at about $90 million. Worries that U.S. Federal Reserve may taper off bond buying led to a crack in the world markets on Thursday, and the Nifty fell 91 points, with most of the mid-caps breaking recent lows. The only silver lining was lower-than-average volumes, thus some buying support on Friday saw the markets holding steady.

The much-awaited banking license guidelines were announced by the Reserve Bank of India on Friday. On the face of it, it seems anybody having a 10-year track record and ability to come up with 5 billion rupees in equity capital can set up a bank. But with the RBI having sole discretion on approvals, very few unblemished names from “acceptable” sectors will be able to pass muster.

Even for those who finally set up a bank, the rule which necessitates 25 percent of branches in unbanked rural regions would be tough to implement.

Reliance and BP’s decision to invest $5 billion in the next three to five years to boost output in the KG D6 gas fields indicates that a compromise pricing must have been worked out.

The decision to allow voice telephony for 4G players is another big booster for Reliance’s telecom plans. These two developments resulted in Reliance Industries being an outperformer for the week.

Air Asia’s decision to enter the Indian aviation sector will increase competition in the cost-conscious market. The airline has deep pockets and a strong partner like Tata could change the contours of the country’s aviation sector.

The important events next week include the Union Budget, the Economic Survey and the Railway Budget, which should set the tone for markets over the next few weeks.

Though other data such as Manufacturing PMI and cement and auto sales figures would be announced, they will be overshadowed by the budget and could at best act as catalysts depending on the direction of the market.

Moody’s downgraded UK’s rating from its AAA status, joining the list of other European countries with grim growth prospects. Overall, the eurozone is expected to contract in 2013. Thus, even a projected 6.5 percent growth for India in 2014 may stand out.

India’s rating is also under watch and the Union Budget could hold the key to whether the country would be in a position to retain its investment-grade rating. I expect the finance minister to deliver a pragmatic budget and stay off the clamour from his some of his colleagues for populist measures. A reformist budget will encourage FIIs to continue with liquidity flows and will also spur domestic fence-sitters to invest in equities. Incidentally gold touched a seven-month low last week at 29,300 rupees and it is expected that the budget may have provisions to curb investment in the metal.

We could see the markets holding current levels and consolidating in the run-up to the budget. The economic survey report on Wednesday could be the first indication of the direction but the budget would be the decider.

The derivative settlement on budget day may also heighten volatility. I wouldn’t take fresh positions at the current juncture as a populist-leaning budget could crack the markets and reverse gains made in the last six months. It would be prudent to buy on a breakout.

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