D-Street seen on a weak footing

Volatility, stock declines expected in short term; outcome of national polls in mid-year would determine further trend

Stock investors might have to brace for turbulent times in the year ahead, with the the US Federal Reserve starting the rollback of its stimulus, known as Quantitative Easing-3 (QE3).

Market participants will closely watch the direction of the rupee against the dollar. The latter is expected to strengthen on account of the $10-billion reduction in QE-3, the Fed's $85-billion monthly bond buying. A stronger dollar could impact inflows from foreign institutional investors, which have played a big role in keeping the ball rolling for emerging market equities, including in India.

Analysts said a five to eight per cent decline in the benchmark indices cannot be ruled out over the next two months. However, expectations of a steady government coming to power after the national elections in April-May, considered the most important event for Dalal Street this year, could limit possible declines.

"There might not be any pre-emptive selling. We would see money going out of the country only after the (US) tapering starts," said Nirmal Rungta, director and head, private client group, CIMB Securities. Foreign investors were the highest buyers of Indian equities in 2013, having net-bought stocks worth Rs 1.12 lakh crore.

The US Fed announced its intention to commence with a partial withdrawal of the QE3 programme in its December-month Federal Open Market Committee (FOMC) meeting, as the outlook on the US economy improved. A stronger US economy is expected to help the dollar gain against other currencies.

"Tapering of QE3 could keep the markets volatile in the short term. The weakness in the market could push the NSE Nifty down to 5,900-levels in the next two months," said Shrikant S Chouhan, senior vice- president, research, Kotak Securities. According to technical analysts, the Nifty could trade in the range between 5,900 and 6,400 in the first two months of the year.

Any fall in the market would be an opportunity to buy, said analysts, as they believe the elections in April-May could limit the negative impact of the tapering. In the long term, participants are hopeful that further downside risk to equities could be capped if the Centre sees the formation of a stable government after May.

"The initial impact of the tapering on stocks will be negative. However, going into June, the impact would be largely absorbed by the markets if the Bharatiya Janata Party comes to power, the market expectation is at this point," said Mehraboon J Irani, principal and head, private clients group, Nirmal Bang Securities.

The impact of any tapering announcement in 2014 after the elections would be determined by the political scenario. The victory of the Aam Aadmi Party in Delhi had cast doubts of a stable government at the Centre, said analysts. In the absence of a stable government, analysts fear further tapering could be damaging to the markets and see higher outflows from foreign investors.

Market watchers said the tapering impact could see stocks of interest-rate sensitive sectors declining the most. This is because most of the 'hot' hedge fund money goes into these stocks.

"Those sectors which have been laggards through the year like financial services, capital goods and other infrastructure sectors would take a beating due to the currency impact. Tapering could further weaken the rupee, prompting the Reserve Bank of India to take corrective measures and perhaps raise rates further," said Rungta.

On the other hand, the currency impact could see stocks of export-oriented sectors such as and health care gaining further on the weakening currency. These are also sectors where foreign investors have some of the highest holdings, as investments from long-term funds are locked in these stocks.