Riding on dollar inflows

Expect a correction by the middle of next week

The market ended last week on a strong note—even after the monetary tightening by the RBI. The market has been up for seven weeks in a row and the chances of a correction next week are high. We expect a correction by the middle of next week.

Although the market was down on the first trading day of the week on concerns of a hike in repo rates, it shrugged off such fears on Tuesday and was in positive territory for the rest of the week.

The government said it expects GDP growth of 7.2% for the current fiscal and 8.5% next year.  The Reserve Bank of India said inflation would come down in the near future. However, it also cautioned that demand-side pressure could intensify again due to accelerating growth and that would need be addressed, possibly through rate hikes.  In the mid-term appraisal of the government’s five-year plan, the poor performance of the power, road and port sectors was one of the major discussion points.

The prime minister said that infrastructure will remain the prime focus area over the next five years, with investments of $1 trillion, while the finance minister said that the government will allow private companies to issue infrastructure bonds.  India's infrastructure sector grew 4.5% in February from a year earlier, lower than the upwardly revised annual growth of 9.5% in January, government data showed on Friday. During April-February, the first 11 months of the current fiscal, output rose 5.3% from 2.9% a year ago. The ongoing rally in the domestic market also brought fresh foreign capital, which helped the rupee hit a 11-week high against the dollar.

In the US, jobless claims for the week ended 20th March were 442,000, which was less than the expected total of 450,000 and down 14,000 from the prior week. The US Federal Reserve said that the stimulus will be wound down, possibly through asset sales, once the recovery picks up. On the last trading day of the week, US stocks were down on the news of sinking of a Korean ship. Although the South Korean government said that it was not clear whether North Korea was involved in this incident, it weighed heavily on investor sentiment.
The mood overseas was positive after European leaders decided to help Greece out of its debt crisis. The Euro nations and the IMF will together offer credit facilities to Greece.  However, investors are still uncertain about the future of Greece and opted to stay away from the Euro and invest in the dollar. The dollar rose against the euro at the start of the week, but the euro strengthened after the decision to bail out Greece was announced.

Two other news developments are expected to boost investor confidence.  A survey showed that private-sector business activity across the euro zone shot up in March, with the largest increase recorded since August 2007. The figures suggest that an improvement in unemployment figures could be in the offing. The purchasing managers' index (PMI) for the euro zone, compiled by data and research group Markit, jumped to 55.5 points from 53.7 in February. Any figure above 50 indicates economic growth. There has also been a rise in new orders, with exports growing at the fastest rate since April 2006.

Foreign institutional investors are still confident about the Indian market, which is reflected in their buying pattern. Foreign investors bought stocks worth of Rs1,906 crore while domestic institutional investors sold stocks worth of Rs213 crore during the week.

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