The Hindu Business Line : Market may continue to march ahead

Both optimism and pessimism on the equity street are imbued with in-built biases. In the short-term both can swing the market mood. Realism, however, generally has its way in the medium-to-long-term.

Dalal Street, which went into value depreciation mode since the middle of January and became relatively under-owned during the greater part of the fourth quarter of 2008-09, is now recovering as discounts on the fear of unknown get gradually withdrawn.

Sentiment on Dalal Street improved last week, as we predicted. The Q4 results, till second week into the season, were not shockingly negative at the aggregate level.

The Senex gained 3.91 per cent last week, while the Nifty went up 3.1 per cent. The aggregate net profit growth in Q4 of 2008-9 for 375 companies, which announced results so far, has been at around 18 per cent, year-on-year. There were individual surprises, which market promptly priced in.

Price depreciations on apprehension over cost escalation and currency risks were, perhaps, little over-done in some cases, particularly big IT companies. But, commodity inflation had its share of adverse impact on the operating margins of manufacturing companies.

Mission inflation

Going by the trend, cost pressure, coupled with lesser pricing power, partly because of the Government intervention, and partly because of possible demand slowdown, may continue in the first and second quarters of this fiscal.

The interest rates, according market intelligence, are unlikely to come down in the near future as the RBI would love to have a tight reign over the inflation.

RBI’s possible measures could lead to tighter money supply and even be biased in favour of appreciation of rupee against dollar. (A fortnight ago the Chinese authorities have let its currency breach the 7-yuan-to-a-dollar mark for the first time since 2005, when it was un-pegged from the greenback).

A high growth and relatively lower interest rate regime could maintain a high capex cycle for the Indian corporations for most part of 2007 simply because extra-ordinary level of inflows from overseas — be it in form of debt or equities.

Money flow

That kind of flow is not foreseen in the medium term. However, liquidity, whether local or global, which is now on the sidelines, may start flowing in if the corporations are resilient and policies are consistent with the evolving situation.

One expects that for the next couple of quarters, RBI (and the Government) may focus more on taming the inflation. If the dual goal of 2008-09 is to keep the inflation growth within a level of 5 per cent and achieving a GDP growth rate of 8 per cent, then third and fourth quarters are likely to see structural change in bringing domestic savings and investments to the aid of boosting consumption.

This week, the market may continue its march ahead if the results do not bring forth negative surprises beyond what have already been factored in. But, a strong rally and return of the momentum may not be possible unless there are unexpected positives in the air.

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

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