Jan 7, 2012

Market Update 7/1/2012

We had a moderately positive first week of the year. Tuesday's large rally has given the market some momentum and it seems that the markets have taken a near- term support of 4675 on the Nifty. This means that should this support hold for the early part of next week, then we could see 4900 in the near term. However the macro economic factors for India remain weak and the rally is not expected to last. 
Investors would be advised to use the current rally to switch funds(if required). Traders can look at the opportunity to make quick profits. But, the long term investor should still be watchful as the markets are still extremely bearish. The long-term(over 3 years) prospects for the Indian economy are still promising and therefore for the enterprising investor there are opportunities galore. 

The Prime Minister has made clear of his intentions to allow further FDI in Retail. The Government doesn't have much choice with the current a/c deficit balooning. The only available option to the Govt to shore up foreign currency is to open up more sectors of the Indian economy to foreign investment. There is a lot of political opposition to FDI in any sector with politicians revving up emotions over the issue. A good show by the Congress in the UP elections will definitely give confidence to the Govt to go ahead with these policies.
We expect the RBI to reduce it's Repo and Reverse- Repo rates when it meets on Jan 24th. The negative food inflation in the past week gives it the room to do so. This could result in a small rally in banking stocks that could spill over to other sectors. It is expected that the private banks will start the rally. Kotak Bank, Yes Bank, Axis and HDFC bank are expected to lead the rally. The FD rates are expected to correct and investors are advised once again to make maximum of this opportunity to invest in long term debt before the rates begin to fall. 
Gold seems to have found some support at Rs 2750/ gram. However the rise in the dollar index is indicative of further down-side risk to Gold. I would advise investors against putting any lump sum investments in Gold at this point as it is expected to weaken further. 
The Rupee seems to be hovering around it's support of 53 to the Dollar. However the macro situation is still not conducive for India and we expect some further downside to the Rupee. Govt moves to allow foreign individuals to invest in Indian equities and moves to increase the NRE FD rates have strengthened demand for the Rupee but this is not expected to last.

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