The Hindu Business Line : Oil may ground FII flow, benchmarks

According to some oil analysts, a number of supply disruptions and falling output have given way to serious apprehensions that the brent may hit $70 a barrel this week. As there is no let up in the US, Chinese and Indian oil imports even beyond the level of $60 a barrel, a big chunk of speculative money was quick to shift allegiance last week to oil instead of equities in the emerging markets.

Last week's drop in money flow was a sobering experience for Dalal Street. After a long time and first in August, the FIIs were net negative investors for two days. Local mutual funds, however, aggressively picked up stocks on those two days. The benchmark indices, through gyrations, managed to stay more or less flat at close.

This week, caution is likely to be watchword for the local market. Continuation of robust overseas fund flow, perhaps, may not be taken for granted. Tempering of greed is likely to cause some profit taking early in the week if the crude price does not witness any sign of slowing down.

The hedge funds, which have been pumping money through participatory notes, are likely to be the first to withdraw. The serious long-term funds are waiting for signals from the Government regarding domestic retail petroleum product price management.

The impact of a sharp upward correction in petroleum products would be on the inflation and cost for industries and sales of automotive sector but it would take a few weeks to emerge. Till then the overall fresh foreign money flow into the domestic equities may move within a restricted band.

As a band of new long-term investors from Japan, Korea and Taiwan is looking at entry into the local market, perception of the economy is likely to dominate the strategy rather than follow-the-crowd principle.

Among the domestic investors, a group of high net worth individuals have been seen moving out of the market. But the mutual funds appear strongly in favour of buying.

This week is likely test the perception of valuation and risk of all market players. Will it require re-rating of Indian market by the FIIs? In case of downward change in value perception, the key indices would definitely come under pressure as local investors are unlikely to provide a great deal of resistance.

The technical analysts have not yet picked up negative signals from the Sensex and the Nifty movements. But a serious selling bout for more than two days may change the equilibrium.

What are the possibilities of that happening this week? The Indian economic numbers are not pack of cards that would tumble overnight. The market also has a fairly stable limit for shorting. The corporate results are still based on firm ground. These should provide cushion for the sentiment in the short-term.

In the mid- and small-cap space, a runaway revaluation spree may see a halt in case of a serious correction in the benchmarks. The overall mood, it seems, would be one for seeking a level of consolidation. The process of reaching a plateau may, however, be bumpy. The volumes may also tend to take a dip.

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