India Markets Weekahead: A spirited rally may be a distant dream

June 23, 2013

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

The week began with the Reserve Bank of India (RBI) maintaining status quo on rates as expected at its mid-quarter monetary policy review. The trade deficit widened to $20.14 billion, a seven-month high and up 13.18 percent over the previous month. Gold seems to be the culprit again and government restrictions don’t seem to deter Indians from buying gold.

The markets held on to hopes that U.S. Federal Reserve chief Ben Bernanke could bring cheer but the indication of a roadmap for a QE3 pullback saw the dollar rally against most currencies. The rupee was among the worst performers, falling close to 60 against the dollar.

The Indian stock market panicked with a deep cut on Thursday but recovered the next day to close at 5667, down 2.42 percent for the week. Though international gold prices cracked below $ 1300, India gold was cushioned by the weaker rupee.

We saw an FII exodus after a long time but it seems to be hot money moving out through hedge funds and ETFs. It’s been a double whammy for these investors since their losses would have compounded due to the depreciating rupee. Logically, we should have witnessed inflows from long-term investors as the Nifty has lost nearly 17 percent in dollar terms in the last five weeks. Either they have changed their view or are waiting for the markets to stabilize but it’s too premature to gauge the mood. In the past, we have seen that the reaction to the depreciation of the rupee lasts a few weeks by which time the effect normalizes and the market absorbs the “new normal”.

Indian government bonds hit the lower circuit due to a sharp selloff by FIIs who preferred U.S. Treasury bonds that declined as well. The 10-year benchmark yield touched 7.40 percent. It seems we should not expect further rate cuts from the RBI in the near future.

Though the government machinery is working overtime to assuage fears, investors are not buying into it this time as they don’t see any corrective action at the ground level. Most political parties are already in election mode and the reform agenda could take a back seat.

Talk of Chinese banking woes and tightening of credit could lead to a slump in commodity demand. Trouble seems to be brewing again in Greece with speculation that the IMF may suspend aid.

The coming week would continue to be volatile due to the expiry of derivatives contracts on June 27. The market seems to having support in the Nifty band of 5600-5650 but if that’s broken, we could witness levels closer to 5400/5420. IT stocks could again see interest due to the depreciating rupee.

It’s still prudent to remain in cash as the markets are at crucial support levels. Though we may have a feeble bounceback, a spirited rally from here seems a distant dream due to lack of any major triggers, even if the rupee were to bounce back to 57 against the dollar. Oil and gold have corrected and that seems to be the only silver lining. On the flip side, if the rupee breaches 60, markets could again press the panic button. Liquidity is king as opportunities are bound to arise across various asset classes.

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