The Hindu Business Line : Dalal Street likely to see range-bound movement

Local market is unlikely to see a savage correction this week even if a few more Wall Street financial asset management institutions report trouble. But it may not witness a rally either, as investment flow is going to be tight. As a result, return of a limited range of movement in the benchmark index is a probability.

Massive intervention by the central banks of the developed markets at crisis management has led to a recovery in the short-term sentiment. The recovery in markets comes ahead of a scheduled meeting of central bank governors From Japan, China, India, Australia and several South Asian and South-East Asian countries meeting in Bangkok on Saturday in a closed-door session appraising recent developments on the global financial markets.

Hazy picture

The overall picture, however, is still hazy and greenback’s continuing strength against euro and other currencies is a serious concern. Between the onset of the credit crisis in August 2007 and the collapse of Bear Stearns on March 16, 2008, EUR/USD rose from 1.35 to 1.58, and lingered around the latter level as the Fed and Treasury assisted other financial institutions in the subsequent months. Since July, EUR/USD has collapsed from 1.60 to a low of 1.39 last week. Even with recent dramatic events, there is no evidence that nationalisation means currency weakness.

If anything, the dollar has held up remarkably well this week, despite several dollar-negative factors, including (i) a higher probability of the Fed cutting the FFR than the ECB reducing the refi rate; (ii) a diluted Fed balance sheet, from the substitution of US Treasuries for other lower-rated securities; and (iii) large increases in the future fiscal burden of the US, from the contingent liabilities that are fiscalised.

“In fact, the only dollar-positive factor this past week was lower oil prices. EUR/USD seems to be drifting back toward 1.45, but we see this move as rather innocuous, given the severity of the financial stress in the US,” Morgan Stanley said.

For Dalal Street, selling by FIIs in the short-term is likely to continue. Rupee’s movement against dollar and crude oil’s price trend would determine the extent of support levels. The Street expectation was that the Prime Minister’s visit to the US this week might also bring some good news. The signals from the derivatives market suggest that the Nifty still has decent headroom of around 150 points.

For the medium to long-term perspective, the capital market may be witnessing a beginning of redefining moment. The impact of the turmoil in the developed financial markets may ultimately be good for the emerging markets such as India, but as the developed markets would go through gut-wrenching experiences, Dalal Street may not be spared.

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