Market see-saw may continue over the short term

Expect a minor rally in the early part of the week and then another decline

Last week we had said that the Sensex has support at 16,600. If this support is breached, we may see another round of sell-off, all the way down to 15,500. Indian markets were under massive selling pressure throughout the week ahead of the quarterly Reserve Bank of India (RBI) monetary policy review on 29 January 2010 and after the government released weekly inflation data. However, the trend reversed on the last trading day of the week after the central bank kept key interest rates unchanged at the quarterly policy review even though it increased the cash reserve ratio (CRR) by 75 basis points. At the end of the week, the Sensex lost 502 points. We expect a minor rally in the early part of the week and then another decline.

On Monday 25 January 2010, the Sensex declined 79 points from Friday’s (22 January 2010) close to 16,780, while the Nifty closed at 5,008, down 28 points.
As per reports, the Centre for Monitoring Indian Economy (CMIE) expects India’s GDP growth to accelerate to 9.2% in 2010-11 from 6.9% in 2009-10.
Meanwhile, media reports indicated that the government is considering an across-the-board increase in excise duty in Budget FY10-11, as it faces pressure to withdraw fiscal stimulus measures in the wake of a 16-year high fiscal deficit of 6.8% in the current financial year. Markets remained closed on Tuesday 26 January 2010 due to Republic Day.

On Wednesday 27 January 2010, the Sensex closed at 16,290, declining 491 points from Monday’s close while the Nifty closed at 4,853, down 155 points.

The International Monetary Fund said that India’s economy would grow at around 7.7% this year and at 7.8% in 2011. As per US reports, consumer confidence hit its highest level since September 2008 to 55.9 from an upwardly revised 53.6 in December. Also, the national retail federation reported that retail sales were likely to rise 2.5% this year, after a 2.5% drop in 2009.

On Thursday 28 January 2010, the Sensex gained 17 points from the previous day’s close to 16,307, while the Nifty closed at 4,867, up 14 points. During trading hours, the government announced that the food price index rose 17.40% in the year to 16 January 2010, slightly higher than the previous week’s rise of 16.81%. The fuel price index rose 5.70% while the primary articles price index rose 14.66%.

The RBI’s data showed that banks’ outstanding loans fell by Rs11,900 crore in the two weeks to 15 January 2010 because companies repaid some loans. The data also showed that loans fell to Rs30,08,000 crore in the two weeks to 15 January 2010 and deposits fell by around Rs22,000 crore. In the two weeks to 1 January 2010, outstanding loans rose by a massive Rs78,192 crore and deposits also went up by Rs82,769 crore. 

On Friday 29 January 2010, the Sensex surged over 360 points from the low of the day to close at 16,358 after the central bank kept key interest rates unchanged. During trading hours, the RBI, in its quarterly monetary policy review, hiked the cash reserve ratio (CRR) by 75 basis points in two stages to 5.75% to mop up excess liquidity from the banking system. CRR is the percentage of deposits which banks must keep with the central bank. However, the RBI kept the key policy rates—the repo rate, the reverse repo rate and the bank rate—unchanged.

The RBI said in its third quarter review that though inflationary pressures in the domestic economy stem predominantly from the supply side, the consolidating recovery increases the risks of these pressures spilling over into a wider inflationary process. The central bank lifted its wholesale price index inflation forecast for the end of the fiscal year in March 2010 to 8.5% from its earlier forecast of 6.5%, but said it expected inflation to moderate starting in July 2010, assuming a normal monsoon and global oil prices holding at current levels. The RBI also lifted its forecast for GDP growth in the current year to 7.5%, from an earlier target of 6%, and said that the current rate of growth is likely to be sustained in the financial year that ends in March 2011.

Meanwhile, as per reports, the RBI called on the government to get its fiscal house in order and said that monetary policy would be ineffective unless the government rolls back its borrowing, which is on track to hit a record Rs4.50 lakh crore ($96.90 billion) this fiscal year.

The RBI also said that it would continue to monitor macroeconomic conditions—particularly the price situation—closely and take further action as warranted. With regard to capital inflows, the central bank said that the inflows so far have been absorbed by the current account deficit. However, sharp increase in capital inflows, above the absorptive capacity of the economy, may complicate exchange rate and monetary management, it added. As per media reports, D Subbarao, RBI governor, said that the interest rate rise would have had an unpredictable impact on liquidity. He also added that it is important to absorb a predictable amount of liquidity before taking other steps.
 

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