Market Outlook: Week Starting 30th June 2008

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The outlook for the market remains grim for the near term as steaming inflation, record high global crude oil prices and high interest rates threaten the pace of growth in the world's second fastest expanding major economy, driving investors to the sideline or to exit.

To tame inflationary pressures, the Reserve Bank of India (RBI) on 24 June 2008, raised its key lending rate viz. the repo rate by 50 basis points to 8.5% with immediate effect, its highest since March 2002 and the second hike this month. The RBI had earlier on 11 June 2008, raised the repo rate, by 25 basis points to 8%. The RBI also increased the cash reserve ratio, the ratio of deposits banks must keep with it, to 8.75% from 8.25% in two 25-basis-point stages on 5 July 2008 and 19 July 2008.

Political factors will also weigh on the market due to the ongoing confrontation between the government and Left parties over the Indo-US nuclear deal. The UPA-Left coordination committee on Indo-US nuclear deal on 25 June 2008 decided to meet again later. Foreign Minister Pranab Mukherjee said the committee completed its discussions on all aspects of the nuclear deal. The next meeting of the committee will finalise its findings. The Left parties have already made it clear that they will withdraw their support to the government if it moves ahead with the nuclear deal. Left parties are opposing the deal saying it undermines India's independent foreign policy and nuclear weapons program. With inflation expected to remain in double-digits in the coming months, it would be suicidal for the ruling coalition to precipitate a political crisis and go for early elections, which are due by May next year.

According to the market experts, the near-term is going to be dictated by oil prices and the medium term is finding the bottom in the market. We are at a point where it is very late to be sellers and it is slightly early to stick your neck out and proclaim that this is the time to start buying. The negative that we are all sensing around is inflation, which is not really a negative, but a consequence of unanticipated inflation. The actions that may come on the policy front are driving the cost of money higher. The dollar had been the weakest currency of the globe in the last four years. A ratio graph of the dollar index vis-à-vis the rupee shows that the Indian unit still continues to be at a 10-year low against a broad basket of 6-7 major currencies.

Going forward, there are only two scenarios. The positive scenario is that the market holds out to around that 4,000 level, the news flow improves a little bit, some triggers come in, which could be crude or global markets and you get a short covering rally which gets the markets back. The other scenario of course is that markets don’t get that pullback - small attempts are made, but they get engulfed by the bad news and don’t find support at 4,000 Nifty. It actually goes down to significantly lower levels in this round, win a climactic finish before any kind of rally materialises.