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Shashi Ashiwal

Will the bull be out?: The Bombay Stock Exchange’s Sensex tumbled below 15,000-mark, as the sentiment turned bearish following the surge in inflation numbers on Friday. Investors are clueless when the bull will regain its strength, considering the current negative news flows from all corners. –

Major benchmarks sank 4 per cent on Friday over apprehension of a severe aftershock of unexpected rise in official inflation. The market in its stretched imagination expected that the last hike in petroleum product prices would not take inflation beyond 10 per cent. The WPI-based inflation for week ending June 7 reached 11.05 per cent setting an alarm that monetary policy tightening measures and harsh fiscal steps are in the offing. It also triggered the chances a political game that might cause an uncertainty over the future of the Government at the Centre.

Suddenly the realisation dawned on Dalal Street that possible negatives, which have not been factored in, have silently stacked up against the equity market. Not only the 9 per cent GDP growth estimates appeared distant, but also corporate earnings prospects in the next few quarters seemed to have dimmed quite a bit in a high inflationary situation.

In the short-to-medium term, this does not augur well for the stock market. Operators would tend to go short and investors are likely to prefer staying away and book profits. Upsides in individual stocks on corporate actions are likely to cause exits rather than fresh entries. Very few appear to have courage to carry through a long-term contrarian call, at least in the short run. Overseas investors, who have been taking out money from local equities, are unlikely to change their stance.

This week, as news unfolds all around, market would try to aggressively price in the negatives. At home, banking stocks would be hit first as bond yields go up increasing chances of treasury losses. But things may not end here. Immediate and further mopping up of liquidity is likely to put pressure on the disbursable funds and firm up the rates. This might unleash a chain reaction for the demand for interest sensitive sectors in particular and the economy as a whole in general.

If further hike in retail prices of oil and gas were allowed, it would mean some reprieve for the oil marketing stocks, but would have a cascading effect on the costs for all the other sectors.

The Government may find it difficult to reign in inflationary pressure in short to medium term if the crude oil prices in the international markets stay at the current levels or go above it. Chances the Central Government fall for lack of support or dissolution of it and calling of an early election seem brighter than before. But for the stock market, it would bring negatives in the medium term.

The only positive that the market can conceive of in the immediate term is that of passage of the Indo-US nuclear deal. Political stakes are high on the inflation and the slipping growth. Market’s stakes are equally high on politics of inflation. A nuclear deal or sharp a drop in crude oil price can only make a difference for the market as well as the politics in this vexed scenario.

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

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