Apr 30, 2011


The markets ended the week negatively as a combination of tepid performance numbers, already high-valuations, and an expected rate hike by the RBI played on investor sentiment. The market looks weak for the near term. Individual scrips will be performance driven, depending on the set of no’s they put out this quarter.

The RBI is expected to increase the repo and reverse repo rates by 25 basis points each (0.25%) on Tuesday in it’s bid to rein in inflation. Short-term lending rates have fallen as Govt spending has increased the liquidity in the system and reduced the ‘cash-crunch’ that saw short-term rates soaring to as much as 10%. Now 1-month and 3-month rates are more in the range of 8-8.5%. However, and I must add, long term rates seem to be going only in one direction- UP! For those of you with the cash, it’s a good time to put in money in a long term FD and lock in the interest rates for some time.

The quantitative easing program of the Fed(QE2 as it is more popularly called) has caused the Dollar to weaken and, to a certain extent, has been the driving force in the recent strong rally that we saw in commodities(gold, silver, oil and almost anything and everything else!) globally. The good news is that QE2 gets over in June. We could see a consolidation in the prices in the commodities space, with some of them even slipping a bit, as the Dollar strengthens. This of course can work against commodities also as good news regarding the US and other advanced economies (which seems to be coming right now!) is counter to that and could send commodity prices soaring further! I’ll be watching the commodity space carefully. A fall in prices is likely to signal a rally in the equity markets with margin pressures being reduced on companies.

Europe is still wobbly with Spain expected to be the next economy to fall off the cliff. I expect that the European Central Bank will simply purchase/re-write most of Spain’s debt(as it has with other debt-laden countries). If this happens, then we could be seeing a round of quantitative easing by the ECB and second round of liquidity induced inflation in the commodities markets globally. Gold & Silver are expected to do well, or at least maintain their current high prices, for some time as the instability surrounding Europe, problems in the Middle-east and inflationary pressures in the emerging economies are bound to send prices of these ‘safe-havens’ upwards.

Coming around to more domestic issues, the results of the recently concluded state elections are due on May 13th. The ruling UPA is expected to do well in 3 of the 4 states in the poll. However, in Tamil Nadu, where the Congress is in alliance with the DMK, the result is a little more difficult to predict. If the alliance loses, then we could see more instability in the centre, and the already much maligned reforms process will be even further delayed. Analysts will be closely watching the results of the polls and the politics in it’s aftermath.

Having said all that, if Global equity markets continue to do well as they have for most of this year, then we could see the domestic market also rally upwards. Pharma, IT and other export driven sectors will be the ones to watch-out for. A leading-indicator to the next rally/fall will be USD:INR currency rates with either a rise or fall signaling the intentions of FII’s.