Liquidity, policy moves needed to take Nifty higher hereon

Equity benchmarks defied gloomy industrial output data and dismal earnings from frontline companies to end 2% higher on the week. The Sensex closed at 17558 and the Nifty at 5320; both indices hovering near their one-month highs.

But it appears to be an uphill task to sustain the gains hereon, unless there is a strong gush of liquidity, or if the government manages to get some key Bill passed in this session of Parliament. Newly appointed Finance Minister P Chidambaram made some assuring statements on Monday, but the market will be looking to some follow-up action. Investors have toned down its expectation on a hike in diesel prices, but are hopeful that the fiscal deficit can be reduced by raising money through partial stake sale by the government in public sector firms. Some have even suggested that if nothing else, the government should sell its stakes in ITC , Larsen & Toubro and Axis Bank , it holds through the Specified Undertaking of Unit Trust of India (SUUTI).

Hopes of the Reserve Bank of India cutting interest rates have risen with the monsoon now having been officially declared as deficient. There have been droughts in 2009 and 2002, but this is the first time that interest rates are so high in a year when monsoon has been weak. This could prompt the RBI to rethink its stance on keep interest rates high to subdue inflation.

The situation in the Eurozone remains fluid, but global markets are cheering every quick fix by central banks, even while being aware that the crisis will take a long time to play out completely.

The market has taken disappointing numbers from Bharti Airtel , State Bank of India , Tata Motors and Ranbaxy in its stride, but lacks triggers that could encourage buyers to commit money at higher levels.

Over the past few days, rating agencies like Moody’s and CRISIL , and brokerages like Goldman Sachs, Citi, and CLSA have trimmed their FY13 GDP growth forecast for India. Except for Moody’s which sees GDP growth at 6% (down from its earlier estimate of 6.2%), others expect growth to be in the region of 5.5%, something unimaginable just six months ago.

The Index of Industrial Production (IIP) declined 1.8%, and while the number in itself may not have been shocking, the decline in consumer non-durable growth is worrying, and shows that the last pillar of the economy is now under attack. The market may have shrugged off much of the negative newsflow at the macro and micro level, the threat of a sovereign downgrade still looms.