Market Update: Week Starting 23-06-2008

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Sustained selling by foreign funds, rising inflation, high crude oil prices and political uncertainty will weigh on the sentiment of the investors in the near term. Indian stocks suffered losses for the fourth straight session today to settle at 10-month low on sustained selling pressure throughout the day. Concerns of further policy tightening by the Reserve Bank of India with inflation reaching 13-year high early this month and political uncertainty, weighed on the market sentiment today.

On the political front, in an important political development during the weekend, Uttar Pradesh chief minister Mayawati’s Bahujan Samaj Party (BSP) withdrew its support to the Congress-led UPA government which is unlikely to upset the UPA government’s standing. CPM, a key left party, may pull out support to the Congress-led UPA government at the Centre. Left parties have threatened to pull support to the government if it took further steps on the Indo-US nuclear deal. Meanwhile, the Samajwadi Party, is reportedly in talks with the Congress on extending its support to the Indo-US nuclear deal. The nuclear energy deal appears headed for an imminent showdown that threatens to trigger early elections.

Further rising crude oil remains a major worry as India imports close to 70% of its crude requirements. The oil price has surged about 40% in this calendar year so far. Inflation, has reached the highest level in 13 years early this month. The wholesale price index rose 11.05% in the 12 months to 7 June 2008, government data released on Friday, 20 June 2008, showed. The rate was above market expectation of about 10% rise. The reading was the highest in 13 years since 6 May 1995, when it was 11.11%. The quarterly monetary policy review of RBI is scheduled on 29 July 2008 but it may take a call much earlier with inflation hitting the roof. Reserve Bank of India had on Wednesday, 11 June 2008, hiked repo rate by 25 basis points to 8% with immediate effect in an effort to contain rising inflation. A further hike in rates would impact bottomline of Indian companies. Also high interest rates may delay expansion plans of corporates, which in turn may impact future earnings growth.

However the good news is that the June-September southwest monsoon has been 45% above average so far this season. Rainfall in the four-month rainy season this year will be near-normal, or 99% of the average between 1941 and 1990, the weather office had said in April 2008. The department classifies rainfall as near normal when it's between 96% and 104% of the 50-year average. Good rains will bolster farm production which in turn may help rein in inflation.

Again advance tax collections till end of last week has risen 27% over the same period last year. Collections till the end of last week were Rs 20,700 crore up 27% from Rs 16,300 crore in the year ago period. Of this, Rs 4,980 crore has come from just 10 corporates, which is a rise of 40% over what they paid a year ago. This is another good news for the market.

But these positive triggers are failing to make any impact in the market and it is witnessing lower levels with sustained selling pressure from FIIs. Foreign institutional investors (FIIs) have pressed heavy sales of Indian stocks this month in the backdrop of a weakening rupee against the dollar. In June 2008, FIIs dumped shares worth Rs 7,125.20 crore (till 18 June 2008). FII outflow in calendar year 2008totaled Rs 22,494.60 crore (till 18 June 2008). On the other hand, mutual funds were net buyers of shares to the tune of Rs 1,919.90 crore in the month of June 2008, till 18 June 2008.

Volatility is expected to remain high in the near term as derivatives contracts for June series are set to expire on Thursday, 26 June 2008.