Markets edgy on high inflation, oil prices

With both the benchmark indices, the Bombay Stock Exchange's Sensex and the National Stock Exchange's Nifty, having lost nearly 4 per cent apiece last week, investors are skittish.

On Friday, the Dow Jones Industrial Average closed at 11,842.69 points, down 1.83 per cent or 220.4 points. The Standard & Poor's 500 stock index lost 1.85 per cent, or 24.90 points, on Friday.

Oil traded higher, reversing declines on Thursday, after reports of increased tension between Israel and Iran that could, in the long run, decrease the supply of West Asian crude oil. Crude oil prices for July delivery settled to $134.62 a barrel on Friday, up $2.69.

The news back home is equally bad as the inflation data that came on Friday show that the Wholesale Price Index (WPI) shot up to a 13-year high of 11.05 per cent year-on-year in the week ended June 7, from 8.75 per cent year-on- year in the previous week, well above the consensus estimate of 9.8 per cent year-on-year.

Market participants feel that in the coming week, India's sovereign rating may get downgraded because of its worsening fiscal deficit position, which may lead to further outflows from foreign institutional investors (FIIs).

"Indian markets may have a gap-down opening on Monday. We see further selling coming into the market, especially from FIIs. Liquidity in the market will remain tight.

Since this is the expiry week, markets will be extremely volatile," said Amitabh Chakraborty, president (equity), Religare, a domestic broking house. FIIs have sold in excess of Rs 20,000 crore worth of equities this year alone.

Already most foreign brokerages have been neutral or underweight on India for some time now. A recent Merrill Lynch report highlights that India is trading at over 17 times twelve months' forward earnings, way above Korea at 12 times or Taiwan at 13.4 times.

Meanwhile, investors all over the world will keenly watch the Federal Reserve's meeting next week. The Fed's policy statement will be picked up by analysts seeking some guidance on the direction of the US economy.

Market participants expect some sort of policy measures from the Reserve Bank of India or the government to tackle inflation, either in the form of duty cuts or rate hikes. Sachidanand Shukla, chief economist, Enam Securities, does not rule out the possibility of 25 basis points repo rate and reverse repo rate hikes if liquidity in the money markets remains tight. If liquidity spurts, we may see a CRR hike of 25 to 50 basis points," he added.

However, most market participants maintain that the next week's inflation figures are likely to be higher since fuel prices are yet to reflect fully in WPI.