The Hindu Business Line : Sensex, Nifty likely to move forward

Uneasiness over relentless money flow from overseas through the portfolio investment route has waned quite a bit. The past week witnessed net outflow worth around Rs 4,707 crore and a perceptible fall of rupee against dollar.

Dalal Street also quite aggressively factored in fresh negative sub-prime related news from the US and Europe. Yet, it managed to remain level-headed, thanks to some tentative local participation.

Liquidity woes

This week, it would not be surprising if the Sensex and the Nifty head up, at least in the first few days.

Indian indices performed relatively better than those in the Asian and emerging markets, afflicted in varying degrees by global liquidity woes.

In November so far, Indian stocks gave a negative dollar-denominated return of around 2 per cent, against loss of about 15 per cent in China and a negative return of about 5 per cent for Brazil, according to Morgan Stanley Capital International. Only Russia (negative 0.6 per cent) performed better than India this month, largely owing to its weighted crude oil equity assets.

In the past weeks since August 21, Indian equities have delivered a return of 33.64 per cent, highest among all markets. Year-to-date Indian equities returned 60 per cent even in dollar terms despite sharp increase (around 12.5 per cent) in rupee value against the greenback.

Morgan Stanley estimated that annually the country can absorb about $40-50 billion of capital inflow without sparking concerns on risks of overheating.

SEBI restrictions

RBI’s recent hands-on sterilisation measures seem to have worked in reducing some of the liquidity overhang and taming rupee appreciation in the short run.

But the sterilisation process has a cost and, hence, inbuilt limitation. For the medium-term perspective, policymakers will continue to face a trade-off between ad hoc measures in containing rupee appreciation and growth, as also job creation.

Is the liquidity outflow short-term? The P-Note fuelled liquidity flow may have taken a breather after SEBI restrictions were pronounced and the emergent financial market situation in the developed markets turning uncertain.

But the medium-term outlook for liquidity flow to Dalal Street remains open. According to market intelligence, liquidity flow is unlikely to dry out on technical grounds alone. The relative risk perception and fundamentals remaining more or less unchanged, net portfolio money flow may gradually turn positive in the next few weeks.

If the European Central Bank pumps money again into the system in the short term, as signals suggest, then return of inflow would not take much time.

The RBI may then have to take out yet another weapon from its armoury to restrict capital inflow.

Interestingly, if Europe begins to show more signs of losing economic momentum alongside the US in the next few months, the combined impact on Indian exports, economy and corporate earnings would obviously be greater than what it is now.

Global investors, who have begun their exercises for the 2008 projection, seem to lower return expectation for Indian equities, but look forward to remain invested and stay relatively overweight.

However, corporate performance based on domestic management of economy and the socio-political transition would be the guiding factor in shaping the forward investment strategies.

(Responses may be sent to jayanta_mallick@rediffmail.com)