The Hindu Business Line : Liquidity crunch likely to ease

Now that derivatives overhang is off and the margin problems have been suffered, the market looks forward to easing of liquidity crunch in the next few weeks. Refunds of money from the primary market big issuers may lessen the overall leveraged burden in the short-term.

Some market players are understood to have got their acts together, according to market intelligence. Dilemma over risk and reward seems to have lessened somewhat for some long-term investors too.

While the mutual funds and institutional investors are focusing on blue-chip stocks, a clutch of hedge funds and local operators are looking at select mid-cap stocks. Heavyweight IT stocks, which have shed their valuations substantially, are likely to attract attention of the long-term investors.

Low volumes

However, volumes are likely to be low and leveraged play may tend to remain within a limit. There is no prize for guessing that if the momentum in the market has been broken for lack of liquidity, return of it would depend also on positive flows. A section of market observers feel that overseas money may sound a tentative directional call, while local money is likely to play the second fiddle for some time.

A section of retail investors, who were waylaid by intermediaries into derivatives, got badly bruised. Their come back to the trading ring may not be immediate.

Risk is a four-letter word when confidence is shaken. Perception of uncertainties is so deep that recoveries are getting muted by a cash-out psychology. In November, after fresh issue of participatory notes were stopped, decline in the overall available liquidity was not felt on Dalal Street as local money flow had surged. But now risk aversion at local and global levels is stalling money flow even though equity prices have undergone a steep decline.

Overseas signals

Signals for meaningful increase in overseas liquidity in the medium term would first be felt on the Wall Street trading in the Indian ADRs. Launch of WisdomTree’s exchange traded fund in the later part of this month may also provide some clue to the investors’ mind seeking passage to India.

After Barclays Capital stopped issuing new certificates under its iPath MSCI India Exchange Traded Note plan since October 26 last year, WisdomTree’s ETF offering would be first major move to test the market on Wall Street for India.

A moderate beginning of equity investments by the employees’ provident funds may also create fresh demand for equities in the medium-term at the local level.

General prognosis is that the customary pre-Budget rally this time around could be weak in the absence of large-scale participation. Equity issues in February are also likely to miss out on the frenzy.

(Responses may be sent to jayanta_mallick

@thehindu.co.in)

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