The Hindu Business Line : As Budget day nears — It's cautious optimism on Dalal Street

At present, it would be wrong to expect the high level of unusual inflow, witnessed in November and December 2004, as the exchange rate benefit has evaporated with the change in dollar-rupee equation.

DALAL Street is moving strictly within a range-bound by known resistance and support levels. The expectations from the Budget are measured. None seems to look forward to the Budget proposals to provide reforms fireworks.

A dramatic reduction in fiscal deficit or subsidy is not on the market's dream list.

However, the quiet changes lined up by the UPA Government for the next fiscal have kept the hope of a new economic order unfolding in the coming quarters.

Last week, the market indices attempted to scale new heights, but could not sustain. On the contrary, the selling or profit-takings did not become aggressive enough to force a sharp slide. The BSE Sensex finished with a loss of 0.75 per cent while the S&P CNX Nifty declined 1.27 per cent.

The foreign institutional fund flow through the week was net positive and better than the previous week, indicating continuation of relative preference for India among the emerging markets.

At present, it would be wrong to expect the high level of unusual inflow, witnessed in November and December 2004, as the exchange rate benefit has evaporated with the change in dollar-rupee equation.

Quick exit of hedge funds in January had made some difference in the overseas flow. It is interesting to note how registered FIIs and domestic mutual funds replaced them in February.

For example, in one shipping counter, FII holding on December 3, 2004 was 8.67 per cent. On February 4, 2005, FII holding crept up to 9.66 per cent as they picked up the stock at lower levels following selling by hedge funds.

This week, the Dalal Street is likely to maintain a mood of cautious optimism.

Volatility may rise, but a significant fall or a strong rally does not seem to be on the cards. In the derivatives segment, the contracts expiry is likely to induce roll-overs in keeping with the bullish undertone.

The possibility of a post-budget rally is becoming brighter as a set of long-term investors are preparing to make entry even at higher levels. However, the sectoral allocation of fresh investments would be clear after assessment of the directional tone set by the Budget proposals for 2005-06.

The new company law, relaxation in FDI norms, greater flow of domestic money into equities and further consolidation measures in the infrastructure sector are likely to usher in a new bull phase in the next financial year.

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