High volatility to remain as markets watch for Budget

The benchmark indices are likely to trade in a volatile manner as market experts wait for the most important government document — Union Budget — to be unveiled on Friday. While the expectations are relatively muted this time, analysts say any negative newsflow related to partial rollback of fiscal stimulus or a more-than-expected hike in excise could play spoilsport.

Investor sentiment is already quite jittery after the recent decision of the US Fed to raise the rate at which it directly lends to banks. The week would also see the expiry of the derivatives contract that would add to the volatility. The market will also keep a close watch on the Railway Budget that would be announced on Thursday.

The last week saw the benchmark 30-share Sensex ending on a flat note, gaining just 39 points. Friday saw the index shedding 136 points, after news that the US Federal Reserve had raised the discount rate charged to banks for direct loans by a quarter point to 0.75 per cent. Justifying the increase, Fed officials said the move would encourage financial institutions to rely more on money markets, rather than the central bank, for short-term liquidity needs.

The move gains importance as the Fed has provided billions of dollars in backstop credit to banks, bond dealers, commercial paper borrowers and troubled financial institutions. Incidentally, this is the first increase in the discount rate in more than three years.

The move, according to market players, gives a clear indication that monetary policy around the world is seeing a lot of tightening. In a note to its clients, ICICI Direct has highlighted the fact that the “focus has been shifting towards the exit policies by major economies and monetary tightening by central bankers across the world”.