India Markets Weekahead – An opportunity for investors

August 11, 2013

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

Indian markets were down for a third consecutive week with the Nifty closing 2 percent lower at 5565 on weak economic signals and disappointing corporate results.

The rupee held on at 60.67 to the dollar.

The appointment of Raghuram Rajan as the next governor of the Reserve Bank of India (RBI) brought the market some cheer. Rajan, a former chief economist at the IMF, is seen as a pro-growth policymaker.

International markets ended weak on concerns that the U.S. Federal Reserve could taper down its stimulus programme. Positive data on the Chinese economy was probably the only redeeming feature.

This week, the Companies Bill replacing the Companies Act of 1956 was passed in the Rajya Sabha. This should lead to better corporate governance and investor protection, which our markets need to restore confidence. The trust deficit seems to be at an all-time high with stocks getting butchered at the first whiff of trouble.

Financial Technologies crashed 64 percent in a day, MCX fell 54 percent in a week, Yes Bank was down 40 percent in a month, Gitanjali Gems wiped out 90 percent in three months, Wockhardt lost 82 percent in five months — all these were considered respectable stocks. Several investor favourites lost 50 percent or more in the last three months and the markets seem unable to absorb adverse news.

A number of important bills would be taken up in the monsoon session of Parliament such as land acquisition, pension fund, Lokpal and RTI amendment in the remaining 12 sessions but the one that will raise a lot of heat is the National Food Security  Bill.

Most asset classes seem to be going through a strain. The RBI’s draconian measure in mid-July led to most debt mutual funds losing the gains made over the last couple of months. For the first time in five years, liquid mutual funds reported a lower NAV.

Real estate prices have also begun softening due to lack of demand. There doesn’t seem to be any place to hide for an investor who prefers capital protection and high liquidity.

The next 2-3 months should be interesting in terms of what the government does with the economic crisis deepening. Industrial output has been negative for the past few months and the numbers to be reported on Monday may not be too different. With foreign capital flowing out,  the current account deficit is widening. Despite elections around the corner, the government may take some necessary as well as tough steps to counter a potential crisis. It could curb currency derivative trading on one hand and ease borrowing norms utilizing the ECB route.

Sovereign Bonds may also be launched to attract long-term dollar flows whereas imports of non-essential goods, especially luxury and electronic goods, may see higher taxes to curb consumption.

Corporate results such as SBI, M&M, DLF, BPCL, Tata Steel and Hindalco would be announced this week along with inflation data. Markets should continue with gains made on Thursday and the momentum could take it past levels of 5650 unless inflation data disappoints.

It’s always “darkest before dawn” and I see that darkness deepening over the next few months. Opportunities will be available aplenty for investors. Most sectors are going through troubled times and those which are not, are extremely expensive and thus are best avoided. Corporate governance with serviceable debt could be a winning combination for the next bull run irrespective of the sector.

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