The Hindu Business Line : Market likely to fall in an extended consolidation phase

At times market’s trend could be misleading. Dalal Street in its attempt to consolidate is throwing up contrasting indications in the recent weeks. In the process, it had created higher tops and lower bottoms in the benchmark index and expanded the playable range in the period between March 19 and May 5. A few weeks ago, the short-term range on the Sensex was between 14,000 and 16,000. It had further been extended between 16,000 and 18,300. But, now a new trend of setting lower tops and lower bottoms has just begun.

Of late, price actions, have increasingly become subservient to short-term developments on weak volumes and a sense of slow sinking has gripped the sentiment. Changing perception of inflation is making the difference. Inflation, which impacts corporate revenue and margins, is belatedly being factored in for the whole financial year. Earlier, market had been trying to readjust earning estimates expecting that high inflationary pressure would pass over in a matter of quarter or so.

Now, with crude oil prices reaching a record high coupled with a declining trend in consumption growth and leveraged spending – both corporate and household – earnings prospect is getting gloomier for the next few quarters.

If one believed Goldman Sachs, which predicted the world might face a crude oil “super-spike” in a trading range from $150 to $200 a barrel as early as October, things appear slipping all around.

In India, energy use is less than 10 per cent of the US on per capita basis, but it imports oil over 70 per cent of its total requirement and the consumer prices of oil is maintained at a heavily subsidised level – just about the half of the international prices (almost like that in China). This leaves enough room for the economic growth applecart to get upset going forward. If the developed economies continue to pursue the expansionist policies, Goldman Sachs’ prediction may come true.

Euro game

Monetary tightening and fiscal measures taken so far at home could not, however, usher in a “comforting” situation. The G-7 cartel of central bankers agreed on April 11 “to monitor exchange markets closely, and cooperate as appropriate,” a synonym for interventions, and ramped-up a “jawboning” campaign to knock the euro off its record high of $1.600. The G-7 enjoyed initial success, knocking the euro to $1.5400, which in turn knocked the crude oil market for a $10/barrel slide to $110.

But the G-7’s plot to knock oil prices lower with a weaker euro began to lose effectiveness when crude oil resumed its upward thrust, fuelled by the Fed’s quarter-point rate cut to 2 per cent on April 30.

In the short term, the local equity market is likely to drift down in an extended consolidation phase, but may not immediately try to find the bottom. However, surprises from the political front may change the complexion of the current game.

A sudden announcement of Lok Sabha elections is likely to push the market to a crash. On the other hand, if the Government can manage to pull off a coup of sorts by going ahead with the proposed nuclear deal with the US, the market would shrug off the creeping weaknesses.

But the possibility of these events is in the realm of conjectures. Only the unfolding medium term developments could indicate which way the market would break the rigour of a range.

(Responses may be sent to jayanta_mallick@thehindu.co.in)