Where do we go from here?

The past 1 year has been good to equity markets with both the Nifty and Sensex returning between 10-15%. However, they both seem to be struggling against long-term resistances of 6100 for the Nifty and 21000 for the Sensex. What are the chances that these points will be breached in the coming year?

We’ve had an action-packed week with the RBI announcing rate cuts and with the DMK withdrawing from the Govt.  The RBI’s rate cut was largely in-line with expectations. Monetary policy will remain restricted as the twin problems of inflation and a high current account deficit continue to persist. Political uncertainty has increased due to the DMK’s move. The Government has been made weaker and the much touted reforms are not likely to see the light of day.

So how will the equity markets react? The downside to the market seems to be capped at around 5600 on the Nifty. At these levels the markets find support from foreign institutional investors (FII’s) who consider these valuations to be cheap (earnings-wise as compared to past history). The long-term India-growth story is still bought by these investors and the current slow-down is seen as a blip and is viewed as an opportunity to enter (or average) at attractive valuations. The upside will also be capped because of government inertia and the worsening macro-economic indicators.

Globally the DOW and Nikkei are at highs and confidence is slowly returning to countries battered by recession. There is a general consensus that the worst maybe over.   There is still some concern as seen recently with the crisis in Cyprus. However, markets seem to have quickly recovered from the jolts and are showing confidence in the ability of governments and central banks to handle crisis. Global markets are expected to rally (with limited upside). India might not participate fully in the rally as oil prices will rise (brent crude is currently $118/barrel) putting further pressure on the current account deficit and the rupee.  

Interest rates are not likely to come down in a hurry and debt markets are expected to remain stable. There is the possibility of small rate cuts in the current calendar year. However, nothing drastic is expected.  

The Rupee could be under some pressure this year. There is resistance at around 54 to the dollar. Support is seen at around 56 but this might not hold for the year.

Gold is in interesting times. In the last 1 year it returned only 5%. If the global economic scenario continues to improve then gold could see a correction. The downside might be limited because of buying by central banks. But, the upside will also be capped as speculators’ interest will dwindle.