Economic Revival An Imperative

Just when broking circles thought that redemption pressures of foreign funds were over, a fresh wave of fund selling has taken the market by surprise.

Till a few weeks back, players were talking of range-bound indices.

But now, uncertainty has gripped the market and most players feel that the slide could continue in the days to come.

The repercussions of the Korean debacle will be felt in the domestic market in the coming days. Funds with an exposure to Korea as well as India will have to sell here in order to meet their redemption demands.

In the light of currency turmoil, it seems certain that FII allocation for South East Asian markets would be lesser next year as compared to the present one. India might get a larger share in percentage terms as the market have remained relatively stable in comparison to other Asian markets. But in real terms, even that would not mean much, said a source at an FII brokerage.

Marketmen feel that the current valuations look attractive but lack of any signs of an economic recovery coupled with lack of institutional activity seems to be hampering market sentiment.

Says Sanjeev Sanghvi, head of dealing HSBC B&K : The current 3350 levels is an ideal support level for the index. But in the absence of institutional activity, the Sensex cannot sustain at these levels.

Usually, there is some amount of pre-election investments by funds and speculators in anticipation of a stable government at the centre.

This tends to spark off a minor rally. To what extent this will prop up trading sentiment remains to be seen. For example, if selling pressure continues and the Sensex falls to 2800 levels, then the rally would bring it back to current levels. On the other hand, if the Sensex continues to hover at current levels, then the rally could push it upwards by a few 100 points.

Valuations are getting attractive by the day, but the market needs a strong stimulus in the form an economic recovery. Unless there is a clear indication on the economic front, the market will continue to remain range bound, says Bharat Iyer, strategist UBS Securities(India)

Another crucial factor that will have an impact on trading sentiment is the Sebi diktat that institutions can only trade in dematerialised form from January 15. Sanjeev Sanghvi adds, In the short run, there could be chaos and confusion before the players are fully familiar with the new concept.

This could also mean lower liquidity in those key stocks which have been shortlisted by the Securities and Exchange Board of India, which in turn could affect the overall trading sentiment as punters will not able to participate in institutional orders.

On the other hand, this could also encourage foreign institutional investors who have been avoiding Indian markets because of problems related with physical delivery to invest in India.