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JAYANTA MALLICK

Benign inflation rate a boost for market sentiment

BACK TO FORM: A file picture showing an anxious stock dealer watching the upward movement of the market in Mumbai - Paul Noronha

Those who thought they were writing the epitaph for the Indian bull market a fortnight ago seemed to have become convinced that their efforts could be saved for another time. Last week money flow from the sidelines to Dalal Street improved and the benchmark index regained a respectable height beyond 13K.

The technical charts may not be picture perfect, but for some, the upward movement may raise comfort level. The India-specific funds also reported to have begun getting fresh attention.

Going by the trend, this week, the Sensex should strive for higher reaches.

The expectations are that the RBI would not push the rates further up and would allow the liquidity level to remain unchanged when it reviews Credit Policy on April 24.

Psychologically, the market seemed ready to ignore the current strength of rupee against dollar in the context of software companies. It may be eating into operating margins of IT companies. But, a majority seems to feel that firm rupee would be good for profit growth in other sectors. A benign inflation rate after weeks seems to have also boosted the sentiment.

Yen-carry trade

But, the still intact yen carry-trade is considered to be doing the real trick. The present buoyancy in the metals and equities markets owes a lot to this source of cheap money. Hence the aversion for higher risk assets took a backseat for the time being. So did the concern over stretched valuations.

Last week, the greenback dropped 1.2 per cent versus the euro and 0.1 per cent against the yen ahead of weekend meetings of G7 and International Monetary Fund. The markets expect that the meetings would end up with a call for a weaker dollar and yen to help adjust global imbalances. Any serious measure to reign in hedge funds is also not on the cards.

The European Central Bank is also meeting to discuss rates and inflation. The expectations are that a direction for the US dollar as well as metals could be set for the rest of the month.

At home, the RBI, which prevented rupee gains from October 2006 to February 2007, has allowed since last month the rupee to appreciate.

But some observers feel that though this will result in further rupee gains against the US dollar over the next few weeks or months, rupee could depreciate quickly if withdrawal of money flow from overseas markets takes place and monsoon rainfall proves inadequate.

The TCS and Wipro will declare results this week. But during the course of this month only eight out of 30 Sensex companies are scheduled to declare results. So, the market is likely to drift a while to pick up firm cues for a medium-term valuation review.

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