India Market Weekahead – Inflation, FII inflows to be key

May 12, 2013

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

The bulls are back and their four-week winning streak saw the Nifty close at a 29-month high of 6107 on Friday, up about 2.75 percent for the week. Liquidity flows remain robust, fuelling the momentum despite political heat in New Delhi.

The Congress win in Karnataka boosted positive sentiment, followed by industrial output data that was marginally better than expectations. The overall earnings season has been favourable and along with the global rally provided the right environment for the markets to cross the psychological barrier of 6100 in the Nifty and 20000 on the Sensex. The only thing missing is euphoria on the street and broader participation by investors.

Politics was in the spotlight with the Congress romping to a comfortable win in the Karnataka assembly election. The victory in the key southern state took the sting out of the resignation of two cabinet ministers. Parliament had already been adjourned without a date.

The diesel price increase of 0.9 rupees per litre is more evidence that the government is not backing down from reform measures. But there is speculation the pace of reforms will now slow considerably as opposition parties have smelt blood.

Though industrial production data was better than expected at 2.5 percent, it’s still too early to spot green shoots. The new investment cycle could take longer than expected as the country gets into election mode. The HSBC PMI data for services was at an 18-month low. A check at the ground level with retailers shows a considerable slowdown, one that explains the extended discount season. Car sales have also disappointed for the sixth month in a row.

Despite these signals, the market has been gaining strength based on liquidity flows with FIIs pumping in $700 million last week. It’s probably Finance Minister P. Chidambaram’s relentless marketing of the India story during his recent overseas visits. Surprisingly, the rupee declined to 54.80 against the dollar despite expectations of a lower current account deficit and continued FII inflows.

The deadline for promoter dilution to meet minimum public shareholding rules will see a spate of offers for sale or placement with institutions. The government too is expected to go ahead with PSU divestment that had slowed due to adverse market conditions. Though this could soak up liquidity, the mammoth HUL buyback will infuse about 300 billion rupees in the system by July 2013.

In the coming week, consumer price index data will be announced on May 13, followed by wholesale price inflation a day later. Favourable data could further fuel the market rally on expectations that rate softening by the Reserve Bank of India will gather momentum. Some important results next week include Bank of Baroda, Bajaj Auto, ITC and Dr. Reddy’s Labs.

It would be disastrous to predict the extent of the current rally. The perceptible slowdown in consumer sentiment and political upheaval is bound to affect the market at some point. I would advise a short-term trader to follow the trend but it would be prudent for an investor to continue booking out at every rise. Though India has been immune to political risk in the longer term, the short to medium impact has been too big to ignore.

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