The Hindu Business Line : Benchmarks likely to see sideways movement

The market is at a critical juncture with the 15,000-mark round the corner for the BSE Sensex. Will it attain the landmark this week? Before making a guess, let us analyse last week's scenario.

Feeling pressure

As reported last week in this column, major benchmarks witnessed further consolidation while metal stocks slipped sharply on the back of Red Kite's woes. (Red Kite is a hedge fund that suffered roughly 20 per cent loss in 2007).

Besides, FIIs, who have been on sidelines, made fresh commitments in the market. According to SEBI's latest data, they were net buyers to the tune of about Rs 2,900 crore against the previous week's position of mere Rs 22 crore.

On the other hand, domestic funds continued their selling spree.

Despite benchmarks remaining firm last week, the advance-decline ratio - a technical analysis that predicts the strength of the market according to the number of stocks that advance or decline in a particular trading day - tilted towards the decliners as the week progressed.

More and more stocks witnessed pressure as the benchmarks gathered momentum.

Higher inflation

The main reason behind the weakness for the equities is inflation. The latest data showed that current inflation stands at 6.58 per cent, a two-year high and much above the Government's desired range of 5-5.5 per cent.

With inflation already catching the attention of all and sundry and elections round the corner in some key northern States, the Government is hard-pressed to take some tough measures to douse the inflation fire.

Hard landing?

The Economist in its February 1, 2007 edition reported that the Indian economy is indeed over-heating.

"When you mention overheating, many analysts point towards China. Yet India displays far more symptoms of the disease. Inflation has risen to 6-7 per cent (compared with 2.8 per cent in China); a record 99 per cent of Indian firms report that they are operating above their optimal capacity; and credit is expanding at an annual rate of 30 per cent, twice as fast as in China," the report said.

"Unlike China, India also has a widening current account deficit - a classic sign of overheating, as domestic output fails to keep pace with surging demand. And if you are looking for a stock market bubble, Indian share prices have risen more than four-fold over the past four years, far more than in China. If something is not done, then a hard landing will become inevitable."

Tightening liquidity

With inflation surging ahead, speculation is rife in financial circles that the RBI might allow the rupee to appreciate to make imports cheaper.

Besides, the RBI Deputy Governor, Mr Rakesh Mohan, recently said that the Central bank would be using monetary policy instruments against inflation, including the cash reserve ratio (CRR).

If the RBI hikes CRR, it could squeeze liquidity further as several banks have already hiked the prime lending rates.

On the back of a strong rupee, stocks of IT companies, whose revenues are heavily dependent on the US, could see some pressure.

With the tussle between bulls, who bet on Budget sops, and the bears, the benchmarks may hover around current levels. Only Budget pronouncements could set the direction and until such time, benchmarks are likely to see sideway movement.

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