Higher interest rates and inflationary pressure likely to dominate sentiment

Jayanta Mallick

Last week Dalal Street struggled, but retained composure. The consolidation above 10K on the benchmark index is intact. Despite many of the regulars stayed outside the ring, FIIs and local mutual funds were net sellers, the Sensex and the Nifty finished the week in the green. Nobody has taken a serious long call yet and unlikely to do that in a hurry. Through the last week movements in the top indices have been directed by short-term considerations. The expiry of June derivatives contracts saw the lowest rollover figure of Rs 16,000 crore in the last one year, indicating low risk appetite.

But, the last moment spurt in the Sensex and the Nifty on Firday was triggered largely by a bunch of operators, who opted for tactical fresh buying. Market intelligence suggests that the delivery based buying in large, mid and small-cap shares by these players, which improved the market breadth and the total turnover (the BSE turnover for example shot up to Rs 3,301 crore against Thursday's turnover of Rs 2,866 crore), is meant for "averaging" the price level of the already held positions. A near-term unloading strategy is embedded in the buying.

This week may see further such tactical moves for redistribution at higher levels. As a result, the benchmark may top 11K mark. The most likely scenario could be emergence of selling and the so called profit-booking after significant spikes assuring volatility.

However, in the process, the Sensex may create a stronger intermediate base around 10K in an extended consolidation phase, which may continue till the end of this month.

Seemingly endless pontification over the global money flow trend, the floundering growth in view of higher interest rates and inflationary pressure is likely to dominate markets in the near future.

Global investors may broadly as also selectively withdraw more money from the emerging market equity funds in the weeks ahead despite Fed rate hike being on the expected lines. All of the major equity fund groups tracked weekly by Emerging Portfolio Fund Research had net redemptions in the week ending June 21, as $7 billion was removed from funds with total assets of $2 trillion. In five weeks of global sell-off and heightened volatility till June 21, investors have pulled about $22 billion from equity funds, or one per cent of their total assets. This is because corporate earning expectations are being lowered in anticipation of an economic slow-down.

Though, one-to-one correlations may not be reflected, it would be difficult for India and the India Inc to bypass the general international trends. Analysts and fund managers are waiting for the early clues to emanate from the quarterly corporate results, season for which is round the corner. For the next two quarters extent of pressure exerted by changing economic dynamics on the corporate net margins would be crucial for the long-term market outlook.

For the medium term, the outlook still remains hazy.

(This article was published in the Business Line print edition dated July 3, 2006)
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