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K.S. BADRI NARAYANAN

Liquidity crunch may dampen spirit

This week, the stock market is likely to stay range-bound as it awaits clear clues to take direction.

With the mega issue of ICICI Bank opening this week, liquidity - the key driver in market recovery - could be under strain.

Besides the issue, uncertain outlook for interest rates and inflation amid strong economic growth may keep market participants on the sidelines.

Liquidity crunch

ICICI Bank is planning to raise up to Rs 10,062 crore (including a greenshoe option of Rs 1,312.5 crore) from the domestic market.

It also plans to raise an equivalent amount through an issue of American Depository Shares.

The domestic follow-on public offering opens on Tuesday, immediately after DLF unveiled India's largest maiden public issue last week.

Through the issue, the real restate major mopped up Rs 9,187.5 crore.

Apart from the DLF issue, advance tax payments made by India Inc also drained liquidity quite considerably from the system, and thus checked the market's momentum.

The ICICI Bank public issue, which set FPO price band at Rs 885-950 a share, is all set to strain the liquidity flow further.

Interest rate worries

Despite benign inflation data, which fell for the seventh straight week to 4.80 per cent for the week ended June 2, market participants are clueless on whether interest rate would be hiked or not.

Their predicament is mainly due to the strong economy, which is still roaring as shown by a higher-than-expected jump in industrial output to 13.6 per cent in April.

That has brought a mixed picture for investors on the possibility of a Central bank rate hike at its next review in July.

According to some quarters, continued strong growth may prompt the RBI to continue a monetary tightening cycle that began in late 2004 to keep prices in check.

Positive global cues

Last week, global markets were resilient, though the domestic market did not participate in a big way.

The US 10-year treasury yields reached a five-year high as traders stepped up bets that the economy is strong enough to keep the Federal Reserve from cutting interest rates this year; global equities gained sharply as investors came to grips with higher bond yields.

However, market participants would be keeping an eye on China, after its Premier, Mr Wen Jiabao, warned that the Government would tighten policy further to prevent the economy from overheating.

All these indicate that the domestic market is likely to witness heightened intra-day volatility.

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