Mar 10, 2012, 04.48 PM IST | Source: Moneycontrol.com

Week before the Budget, does market momentum favour bulls?

The market is weird. Every time one guy sells, another one buys, and they both think they're smart.

The market is weird. Every time one guy sells, another one buys, and they both think they're smart.

Are you one of them?

Buying interest in rate sensitives and short covering saw the Sensex put up a stellar performance as the BSE benchmark advanced 357.72 points or 2.09%, to close at 17,503 while the NSE benchmark gained 113.10 points or 2.17% to close at 5,333 for the week.

Given that the Sensex has scaled past the 17,500 level, Sudarshan Sukhani of s2analytics.com says the signs show the correction is done with and the uptrend has resumed. “So momentum should be favourable to bulls,” he adds.

For Sudip Bandyopadhyay, the managing director and chief executive office of Destimoney Securities, today’s rally was predominantly driven by global cues. “A positive outcome on Greece, China’s inflation coming down, a positive outlook on the US’ employment data, a strong MCX listing and finally the RBI governor’s statement that SLR needs to be brought down is bringing cheer to this market.” All this put together leaves the Indian market in a sweet spot, he adds.

Wednesday saw our market tumble across the board with many analysts and traders asking – is the bull run, which the Indian market has almost exclusively enjoyed since the start of 2012, over and done with?

To answer this, let’s take a step back and look at some of the newsflow that is making our market tick nervously:

- The Congress party’s flop show in the most politically vital state of Uttar Pradesh is a blow to the government, reducing the Centre’s scope to re-launch reforms and reverse a slowdown in economic growth. 

- The earlier expectation of an interest rate cut in the RBI’s March credit policy has dampened sentiment. The RBI’s cutting of the CRR by 75 basis points to 4.75% will now inject Rs 48,000 crore into the system. Now, any indication towards an interest rate cycle change, even if it happens in April, will help the market a lot.

- One word – Greece. The beleaguered eurozone nation continues to swim in unsafe waters even after it won strong acceptance for a bond swap deal with its creditors.

- Crude oil concerns are hitting India below the belt and how. As the largest item on our import bill, it’s a double whammy for our twin deficits – the current account deficit and fiscal account deficit.

- In exactly one week, Finance Minister Pranab Mukherjee will unveil his Union Budget for 2012. Global investors are on ‘wait-and-watch’ mode as to whether the Congress will succumb to more populist pressures or do something more pragmatic and growth oriented and take some decisive measures to bring the fiscal deficit under control.

Sanjay Sinha, the founder of Citrus Advisors says he expects the week before the Budget to be choppy on account of the newsflow pouring in globally and domestically. He says it is singularly impossible for any single policy statement to meet all expectations. The expectations of Mukherjee tweaking the excise duty, service tax, bringing the Securities Transaction Tax (STT) down or removing it altogether are high and might just offset the negative sentiment which will come from the excise duty and service tax.

A growing concern is that the FII inflows that we saw in February might not get repeated in March. Sinha says that the fact that the Greek crisis has had a very orderly settlement at least for the time being, has taken away that threat perception that the FIIs could turn negative on us.

There is an expectation that the fiscal consolidation this time around in the Budget maybe cosmetic in nature and hard reforms maybe deferred. Bandyopadhyay says post the debacle at the State elections, expectations are very low. But if the government were to at least talk about a roadmap for fiscal consolidation, it should be good enough for the market.

The overall liquidity deficit has been persisting above the RBI’s comfort level. The apex bank’s CRR cut was done to ensure smooth credit flow. While a 50 basis points would have been adequate, a 75 basis points cut gives more elbow room to maneuver.

According to Sinha, the bigger trigger for the market would come once the RBI actually starts cutting rates. Once that comes into being, the market would actually react a little impatiently and would actually discount all the further rate cuts to happen over the next 18-24 months. “Therefore, I would expect the Indian market to take out the previous highs in 2012 itself.”

So we leave you with this to ponder on - With the RBI tackling the liquidity situation with a CRR rate cut, will the March 15 credit policy meet be a non-event?

Chelsea Saldanha
chelsea.saldanha@network18online.com

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