The Hindu Business Line : Equity market may remain volatile this week

When on July 22 Dr Manmohan Singh’s UPA Government won the trust vote, there was an overhang of shorts about Rs 13,000 crore by the foreign institutional investors on the Indian equities market. According to market sources, the trust vote results and the consequent brightening of the possibility of the nuclear deal with the US materialising by the end of the year obviously turned the sentiment positive.

But apart from a psychological change, the political development arrested the growing number of short positions. On the contrary, shorts have begun to be covered gradually.

This week the equity market may remain volatile, but a positive bias is likely to surface as the selling tendency is replaced by holding strategies, if not by clear buying.

Markets reacted positively on the hopes that the UPA Government would now speed up the reforms. But most importantly, the global crude oil prices have undergone another bout of correction last week. From a peak of over $147 a barrel on July 11, it has come down below $124-level during the weekend.

Already, there is talk of a further correction is in the air. Investment bank Lehman Brothers has predicted that crude oil prices would fall to $93 a barrel next year, as OPEC raise their supply and the slowing global economy squeezes demand. The bank expects signs of slowing demand and an expected increase in supply to push oil prices lower. Commodity and investment expert Mr Marc Faber also feels that crude is doomed to slump below $100 a barrel, as hardening interest rates and slowing demand makes a speculative binge in the crude oil market uneconomical.

Nine out of 10 previous post-war recessions in the US began shortly after a big spike in the price of oil and those recessions always slashed oil prices dramatically. Earlier, observers, who have been predicting both a nasty US recession and oil prices of $200-300 a barrel have, perhaps, contradicted themselves historically.

Domestic scene

At home, the Reserve Bank of India, which is scheduled to review monetary policy this week, would obviously be under relatively limited pressure, in the backdrop of correction in crude oil prices to raise the key rates. It may restrain its hawkish stance this time to watch the inflationary trend in the next month. If this happens, it would be yet another positive for the financial and equity markets.

Some of the sectors, particularly the real estate sector, are reeling under short-term funds crunch. Market intelligence suggests that some of realty players have borrowed money to complete ongoing commercial projects at interest rates as high as 30 40 per cent.

Causing volatility

While the market may turn positive on a short-term reprieve from the monetary authority, there are still a few issues that may cause volatility in the market. On the political front, any development regarding allegations of horse-trading during the vote on the confidence motion may cause jitters in the equity market. On the corporate front, fresh developments related to the Ambani siblings may also cause fluctuations. Though from the economic perspective the market does not apprehend any sudden jerk, a slow monsoon has kept the punters guessing.

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

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