The Hindu Business Line : Foreign funds may decide direction at Dalal Street

FIIs, already active in India, agree that the government's performance has been behind Standard & Poor's recent upgrade. They have also learnt to read the signals of an alliance Government better.

THE last week bullishness on Dalal Street was greatly influenced by return of liquidity from overseas funds. A nominal 0.25 percentage point hike in Fed rate removed the short-term apprehension of liquidity crunch for the emerging markets.

Optimism about corporate earnings and a greater comfort with the government's economic policies still make India a compelling destination for overseas investors.

As fresh overseas flows came in, domestic players stepped up their activity in the Sensex and the Nifty stocks. However, borrowed funds played a key role in increasing the valuation levels for the local punters. Hence, domestic liquidity is skating on a relatively thin ice; if the benchmark indices slip from the current levels margin calls would sponge out additional local money double quick.

This week market will either have to live with this vulnerability or cross the resistances convincingly for maintaining the bullish momentum.

The determining factor for movement in the key indices would be the FII flow.

According to Emerging Portfolio Fund Research, India-specific country funds, Asia (ex-Japan) and Pacific funds are seen increasing their holdings in Indian equities.

According to a latest report of the research organisation, "doing better than expected has been a recurring theme for India in recent months. Corporate earnings have exceeded expectations. The economy appears to be weathering an indifferent monsoon season, stronger rupee and the effects of December 26 tsunami", the report said with a note of surprise.

The FIIs, already active in India, agree that the government's performance has been behind Standard & Poor's recent upgrade.

FIIs have also learnt to read the signals of an alliance Government better. The Government's alliance with the communists is not frowned upon any more.

In the coming weeks before the Budget announcement for 2005-06, market moves may be tempered by caution.

Will a strong rally precede the Budget? Though it is a difficult call, a section of market players is ready to bet on it.

But volatility appears to stick to the domestic market in the short-term.

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