The Hindu Business Line : Benchmarks may climb the rough path

LAST week, we indicated in these columns that Friday might suggest beginning of a bounce back in a bearish market with slight increase in trading volumes, and also talked about a possible increase in interest in IT and telecom stocks.

The trading through the week, by and large, reflected the trend on the expected lines. However, this does not mean that the local stock market is out of the woods. The return journey from the May 17 collapse has been slow and jerky. Rough rides are still ahead.

If retail investors, economists and political establishments have been clueless to the market behaviour, it is because they are not familiar with the structural deficiencies that accentuate a crisis of confidence in the stock market.

In an extraordinary situation like the one on May 17, the lack of institutionalised short-term credit line to brokers, absence of physical settlement in derivatives segment, inefficient margin trading and stock lending practices as also slow money transfer system in banks have all contributed to heightening the crisis.

Investors have time and again been hit and voluminous reports and recommendations, including those of two joint parliamentary committees, have never been implemented in full.

The market manipulators continue to outsmart the regulators, who are primarily focused on smooth settlement of trades and projection as proof that the market integrity was quite intact.

Interestingly, as the relationship of stock indices and the economy is imbued by the element called sentiment, the objectivity and rationality may not be taken for granted.

When May 17 took place, there was hardly any perceptible change for the negative in the economic indicators and now when the return of market confidence looks like a strong possibility, economic indicators have turned wonky if not negative.

The Budget, which is barely 10 days away, may not prove to be a panacea for all the economic ills that the market perceives to be bugbears. Still the expectations are high.

Market players think the apprehensions have been discounted. If not for future growth perspective, the key indices have hit a P/Es that are attractive. So now it's a value game.

For the market makers, confidence is as important for the lay investors. But the price, the effect and not the cause, often becomes a cause in the market, particularly when it is time to turn.

The FIIs on last Friday made a gross purchase of Rs 711 crore, third highest number in June, first two being on June 1 and 2. Last week also showed that FIIs were getting out of debts. Domestic mutual funds remained largely net sellers.

This week the key indices are going to move up further. The power sector, particularly, may attract buying because of the signal from the Centre that subsidies would not be allowed from the Budget, if a State intends to provide relief to the farmers, may do it from its own coffers.

The Sensex is likely to top the 5000-mark before presentation of the Budget. Some in the market is expecting a voluntary disclosure scheme. If it happens, it may be a booster for the market.

According to chartists, the short-term picture has improved significantly. A short, sharp and crisp bear rally is expected. The market breath would signal the longevity of the smart move.

However, experts suggested that significant investment buying would come in only after confirmation in change in long-term outlook is in hand.

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