Sensex loses steam as FIIs sell on fears of a rate rise

The end of Osama bin Laden did not bring an end to the near-term worries of the Street, as the BSE Sensex fell for the sixth consecutive session on Monday. The index lost 138 points to close at 18,998.

With on Monday’s loss, the benchmark has shed 604 points or three per cent over the past week, closing below 19,000 for the first time since March 28. Foreign institutional investors have remained net sellers for the past six sessions, selling stocks worth Rs 2,661 crore. This includes provisional figures for on Monday, when FIIs were net sellers for Rs 261 crore Though mutual funds and domestic institutions were net buyers during the period, they bought only Rs 78 crore. Domestic institutions remained sellers for four of the six sessions.

Spiralling inflation numbers and company-specific concerns over earnings of key index movers such as Reliance Industries and Infosys have put off investors, both domestic and foreign. RIL has alone contributed 160 points or over a quarter of this fall. Last week, US bank Goldman Sachs downgraded the stock's outlook to ‘neutral’ on concerns over gas output numbers.

State Bank of India, HDFC Ltd and HDFC Bank are other leading losers in the past six sessions. Each contributed close to a tenth of the 600-point correction.

Analysts feel these stocks have gone weak as they are staring at the possibility of a 50-basis points rise in policy rates by the country’s central bank, fighting to keep prices in check. High crude oil prices, up 30 per cent in the near term, are putting upward pressure. The Reserve Bank of India seeks to douse the demand through another rise in rates. A higher interest rate environment reduces the attractiveness of stocks over debt investments.

TOMORROW & AHEAD
Amar Ambani, head of Research (India Private Clients), IIFL, said even positive numbers on trade data and core sector growth had not cheered markets, as investors are worried about the rate action the central bank is likely to announce tomorrow. “The Indian market did not benefit from the news that US troops have killed Osama Bin Laden in Pakistan. It also chose to ignore largely positive economic reports on trade data, manufacturing Purchasing Managers Index and core sector growth. Traders and investors were nervous ahead of RBI’s policy announcement on Tuesday.”

According to him the central bank, which has been trying to walk a tight rope between managing inflation and sustaining growth, is widely expected to raise benchmark rates another 25 bps. “But there have been some murmurs that the RBI could go for an aggressive 50-bps hike. That will be short-term negative for realty, banking and auto sectors, specifically.”

Even technical analysts feel the indices are trading periliously close to resistance levels. The Nifty, the broad-based index tracked by technical analysts, closed at 5,701 points on Monday. According to Sharekhan analysts, it closed below its 200-day simple moving average, “A bearish sign for the market in the short term”. The Nifty has been trading in a range between 5,945 and 5,693 for the past four weeks and on Monday it has corrected down till the lower end of the range. “From here, the 200-day exponential moving average (DEMA, 5,633) holds the key for the medium-term outlook. If the Nifty closes below this level, then the acceleration on the downside will begin,” the Sharekhan analysts warned in a note to clients.