The market marked time through the last fortnight with no change in net index levels. This was despite quite a bit of price-sensitive newsflow. The Index of Industrial Production (IIP) bounced above eight per cent year-on-year in October 2012, which is the best performance it has delivered in the current financial year. It would, however, be over-optimistic to read too much into this. A large part of the rise could be written off as a base effect owing to a weak October 2011. Nevertheless, the IIP trend seems relatively positive. Inflation numbers were less rosy. Consumer inflation edged to near double-digit at 9.9 per cent year-on-year in November. The wholesale price indicator was lower — at 7.25 per cent.
Putting these data together, a policy rate cut in the Reserve Bank of India (RBI’s) December 18 review appears improbable. Growth is coming off the floor; inflation is still far too high for comfort. Ergo, RBI will probably continue to err on the side of caution and at best, it will indulge in another cash reserve ratio (CRR) cut. This is the consensus expectation. If it is met, the Bank Nifty will probably hold its ground at current levels, or decline a little if there’s no CRR cut. If RBI does cut rates or hike them, there could be a swing of about five per cent in the appropriate direction.
Apart from broad considerations of monetary policy, RBI also needs to review bank balance sheets with Basel-III implementation on the cards from January. The sector is under stress, with public sector banks facing serious pressure owing to rising non-performing assets (NPAs) and restructuring requests. Banks will need to raise huge sums over the next five years.
The immediate priority for the central bank will probably be tighter provisioning to deal with NPAs, rather than an opening of the credit tap. Of course, you can make a case for a rate cut on the logic that it would make it easier for borrowers to service loans and maybe, boost demand. But RBI is more likely to wait, I think.
There was a lot of money pouring in from overseas during the last fortnight. Foreign institutional investors (FIIs) collectively bought nearly Rs 11,000 crore of Indian equity in the first half of December, which is almost as much as they bought during the whole of November. It seems some of the “firangis” are playing catch-up at financial year-end to ensure their portfolios hold reasonable India exposure.
| Current (Dec 14) | Value Nov 30 values | Equations Change % | |
| Nifty Value | 5,879.60 | 5,879.85 | 0.00 |
| Index PE | 18.6 | 18.7 | -0.10 |
| Index dividend yield | 1.4 | 1.4 | 0.00 |
| Index Book value | 3.12 | 3.1 | 0.02 |
| USD INR (RBI Ref rate) | 54.39 | 54.52 | 0.24 |
| FII net buys/ sales (Dec 1-15) | 10,874.58 | 10,967.1 (*) | |
| DII net buys/ sales (Dec 1-15)# | -2,278.83 | -2,397 (*) | |
| # Rs crore, *Nov 1-30 net buys/ sales | |||
The FII buying had a positive effect in pulling the rupee up versus the dollar. This trend of the rupee-strengthening might continue through the next fortnight as well, if two things happen. One, of course, is FII continuing to remain net buyers and thus, affecting the specific dollar-rupee rate. The dollar might also get hit globally versus other currencies, as the fiscal cliff looms closer, assuming US policy remains log-jammed. Incidentally, the information technology industry has declined — a response in-line with its known inverse relationship with a strong rupee.
Domestic institutions upped their selling slightly, but net-net the market received inflows in the past 10 sessions. The major indices saw no net changes over the fortnight as the FII focus was more on the Nifty Junior and the Midcaps and those stocks gained.
Global markets have shown surprisingly little reaction so far to the political crisis in Italy or the elections in Japan. On the domestic front, Parliament seems to be more or less functional. Elections in Gujarat saw a high first phase turnout. The scuttlebutt in the Bharatiya Janata Party is that Modi needs to win 120-plus seats to strengthen his internal case as prime ministerial candidate.
It was a big week for initial public offerings (IPOs). The Bharti Infratel issue met its subscription quota, but only just, at 1.3x. This was in contrast to the admittedly, much-smaller CARE issue, which was massively over-subscribed at 40x. The PC Jewellers IPO also hit a respectable 7x subscription ratio. On the basis of this evidence, the primary market is certainly not moribund. But investors are likely to be choosy and selective rather than enthusiastic. The Government of India will have to plan and time its disinvestment programme carefully in the circumstances.
In other corporate news, the technical problems at KG-D6 appear to be getting worse with Reliance shutting down yet another well. This means the gas-based power and fertiliser industries will continue to suffer shortages through calendar 2013 at the least.
The major market indices hit successive highs in the past 10 sessions, but failed to maintain those levels. The Nifty has traded a narrow range in the past three weeks. It has stayed above 5,820, which was the level from which it broke out in late November. It has tested resistance above the 5,950 level, with the current 52-week high at 5,965.
Range-trading between 5,825-5,975 cannot continue indefinitely. The range is too narrow and there is far too much potentially sensitive news expected to break before this settlement ends. A breakout till 6,150 or a drop till 5,650 could occur in two or three big sessions once the range-trading pattern breaks. Bigger moves than this projected 200-point swing are also entirely possible. Volumes tend to get thinner and the market correspondingly more volatile over the Christmas-New Year period.
Technically, the Nifty has to stay above support in the 5,775-5,825 zone if the uptrend is to be maintained. If this happens, it should beat 5,965 on the upside soon as well and thus, maintain an uptrend. Targets of 6,100-plus could be possible on such a move. A trend failure with a pullback below 5,775 could mean a slide till the 5,575-5,625 level. Although things look positive on balance, I’d stay hedged with deep Nifty puts going into the last 10 sessions of the year.
