Bulls likely to hang on even in the face of negative cues

For weeks, Dalal Street key indices have not been driven by a decisive directional call. The bulls do not have the guts to make substantial purchases and change the tenor. The so-called bear operators lack the conviction to unload significantly and profit.

Market-moving is a risky proposition when fundamentals show signs of lingering uncertainty and news flows swing sentiment.

This week negative developments may stack up against feeble positive cues. But it is difficult to foresee the bulls leaving the ring. If they do, it would extend their losses disproportionately; their compulsion would force them to lend support at lower levels intra-week and also inter-week.

The concept of efficient pricing may not work in the short term. Those who say that the glass is half full point out that spikes in crude prices appear to have been arrested. If Saudi Arabia can avoid being sucked into the turmoil in the crucial oil producing West Asian and North African region, a further flare up in crude oil prices may be averted.

The disaster in Japan may halt its economic activities in the short term and may serve a blow to oil market speculators. But Japan would require more oil in the next few weeks as it goes through its last phase of winter without a number of functional power utilities to fuel reconstruction. But this may not be turned into an excuse to dump stocks on Dalal Street.

If escalation in inflationary pressures stops even temporarily, market sentiment should not theoretically flag. The US President indicated that if things go out of hand on the crude price front, the number one global economy could begin pumping out from its strategic petroleum reserve.

So, the optimists insist, speculators would not dare to pump up crude oil prices from the current levels.

In view of moderation in food inflation, the argument runs, the RBI may breathe easier than expected with a token hike in policy rates on March 17. But market may tank if there are fresh negative political developments at the local level.

A trend of rising risk aversion is palpable. Cloudy corporate earnings growth in the current quarter and the next has already kept a large number of investors on the sidelines.

Some analysts say market would significantly correct and see the benchmark's bottom at around 16,000.

Latest IIP numbers showed that six core industries — having a combined weight of 26.7 per cent — were laggards in the period between April and January registering a cumulative growth of just 5.6 per cent while the overall growth was 8.3 per cent (9.5 per cent last fiscal).

Nomura says year-on-year growth in industrial production will likely remain depressed in the near-term mainly due to adverse base effects, but also because of the increasing cost of credit and rising input cost pressures. “Overall, we expect GDP growth to moderate to 8.0 per cent y-o-y in FY12 from 8.6 per cent in FY11 led by slower agriculture, manufacturing and government services sectors, but private services and exports are the tailwinds. We expect WPI inflation to moderate to 7.9 per cent y-o-y in February from 8.2 per cent in January, but with inflation above the comfort zone, we expect the Reserve Bank of India (RBI) to hike the repo and the reverse repo by 25 basis points each.”

It expects an additional 50 basis points in the remaining months of 2011.

Deutsche Bank forecasts manufactured goods inflation to rise 0.5 per cent m-o-m in February (4.1 per cent y-o-y), which is likely to drive headline WPI inflation lower to 7.8 per cent, from 8.2 per cent in January.

Espirito Santo Securities says oil, autos and consumer durables are most susceptible to the impact of high inflation on costs. Healthcare is the most defensive sector.

( >jayanta_mallick@thehindu.co.in )

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