In these columns this writer had in the past few weeks been expressing apprehensions about a possible correction in the short term. Quite a number observer also said the range-bound movement may not sustain. But some still said that a rally was on the cards in the near term.

There are, however, several pointers to suggest that this optimism is losing relevance. It may further die down this week.

The end of QE-2 and domestic economic downturn is coinciding this month. According to market intelligence, the representatives of FIIs, who last week met the Finance Minister, Mr Pranab Mukherjee, left unconvinced. One of them told Business Line that at this stage it was difficult to talk up the market.

Mr Saurabh Mukherjea, head of equities at Ambit Capital, said: “For the last five months we have been saying that the combined effect of local economic slowdown and closure of QE-2 in June would be negative. FIIs were predicted to be in a withdrawal mode.”

He said that the corporate earnings growth is likely to struggle to reach double digit in FY2012. The GDP growth may be closer to 7 per cent and not around 8 per cent, Mr Mukherjea added.

According to Mr Nick Paulson-Ellis – Country Head at Espirito Santo, a greater clarity on the shape of the investment cycle should come between now and September, as the end of QE2 potentially further softens global commodity prices, and a combination of global and local food price moderation signals a stabilisation and then decline in inflation, and with it the end of the tightening cycle.

The rising input and interest costs are squeezing margins and pushing out investment decisions, he said. “Our analysis of earnings revision of BSE-100 companies reveals that the street has downgraded 60 per cent of the companies after March and upgraded 36 per cent, whereas there has been no change in estimates for 4 per cent companies.”

Deutsche Bank's analysts said economic outlook suggested slowing of growth, but said that the economy was poised to maintain 8 per cent plus growth in FY11-12. However, it added that aggressive rate hikes from RBI to control inflation and high fiscal deficit due to elevated commodity prices could dampen investor sentiment further, leading to a slowdown in growth momentum.

Standard & Poor's credit analyst Ms Geeta Chugh expects the non-performing loan ratio of the banking sector to peak at 2.6 per cent in fiscal 2011 and may decline to 2.4 per cent in fiscal 2012.

For the manufacturing sector, raw material cost as a percentage of sales has been on the rise from 42.6 per cent in 4QFY10 to 44.8 per cent in 4QFY11, the highest in two years. The general inability to pass on the higher raw material costs led to an EBITDA margin contraction by 146 basis points in 4QFY11, versus a year ago, Mr Paulson-Ellis said.

Evidently, companies have been shying away from making fresh investment decisions in the current high interest rate regime. Absolute interest expense, however, increased by 28 per cent Y-o-Y.

( >jayanta_mallick@thehindu.co.in )

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