Rally likely to gain strength, but...

Govt's hike in diesel prices, though welcome, is unlikely to prevent the oil pool deficit from being much higher than in 2011-12

The Indian markets have been largely moving on what has been happening globally.

After being the focal point of discussion for over a year, the Euro zone crisis has been put to rest, at least for the near term, courtesy ECB President Mario Draghi’s pledge to save the euro, followed by the unlimited bond-buying proposal. The decision by the German constitutional court, last week, to ratify German support to the European Stability Mechanism (ESM) has been another positive.

The US Fed’s decision on Thursday to oblige the market with a QE3 and a fresh round of mortgage bond buying is likely to unleash yet another liquidity surge across global markets, thereby extending the ‘risk-on’ rally that we have witnessed since the time the ECB chief had pledged to save the euro.

Even if markets do not go up dramatically in the very near term, the case for a significant correction, at least from a global liquidity point of view, does not appear likely now.

I will be surprised if the present rally fails to stretch itself further. We could even be discussing Nifty levels of 5,600 or 5,700 or even a 5,800 over the next couple of months. I think there is potential for the market to go up because there have been bouts of scepticism all throughout the year and marketmen were positioned very conservatively.

The Indian markets, at the moment, are focused on just one thing: Liquidity. Something has to change with global liquidity or the perception of ‘risk-on’ to change the contours of the market at this moment.

And, while this is a liquidity-driven rally, the fact is that liquidity is chasing quality. While there could be lack of general conviction in a broad market rally, there is definite conviction in individual stocks and sectors, which have held out pretty well over the last one to two years.

Consequently, even as the stock indices struggle at nearly 17 per cent below their January 2008 highs, nearly one-third of the Sensex scrips are quoting much higher today than what they were quoting at then. Most of these are from the consumption, pharma, private banking and technology space.

Fundamentally, India remains on a weak wicket with macro indicators having worsened further over the year. ‘Falling’ gross domestic product (GDP), ‘low’ index of industrial production (IIP) numbers, ‘stubbornly high’ inflation, policy inaction and India Inc’s rising despondency, remain major negatives.

Add to this, we are running a fiscal deficit that is three times the emerging market average. This is a serious concern. Also, when the then finance minister Pranab Mukherjee had presented the Union Budget this year, he had assumed GDP growing at 7-7.5 per cent. Now, that we are expected to end 2012-13 with a growth of around 5.5 per cent, tax collections are certain to fall short of the target. Similarly, with no serious effort to cut subsidies (till now), the deficit is widening. Also, against the Rs 30,000-crore targeted for divestment in 2012-13, we are yet to open the account there.

Surely, the global rating agencies who had given us a time-window of six months, are watching.

Last week, the government, increased diesel prices. Though welcome, this is unlikely to prevent the oil pool deficit from being much higher than in 2011-12.

A lot more needs to be done. To start with, we could pluck the low-hanging fruits like concluding the Vedanta offer for Balco and Hindustan Zinc, carry-out small-ticket divestments, encourage cash-rich PSUs to speed up investments, etc.

While steps like foreign direct investment in aviation and multi-brand retailing have been announced, India needs to do much more in terms of implementation, bringing down subsidies, etc to impress the rating agencies. Otherwise, there is a distinct possibility of the Indian markets underperforming its global peers.

Ironically, India has some of the best brains at the helm of affairs. But time is running out. Can they deliver and keep the rating agencies at bay? Fingers crossed...

The author is Principal & Head – Private Client Group (PCG), Nirmal Bang Securities