All eyes on F&O expiry, credit policy

MARKET WATCH

Stock markets are entering a volatile zone, with the derivatives segment slated for a settlement next week. With the settlement nearing, the open interest (OI), which was Rs 92,600 crore at the weekend, is inching towards the Rs 1 lakh crore mark.

The put-call ratio too is increasing and is on a higher side at 1.8. Brokers do not see any problem in a rollover this time as the market momentum favours the bulls. The market, however, is becoming more vulnerable to volatility as it surges at a greater pace.

According to a technical report of Religare Securities, "The asking rate for the bulls to maintain the present momentum is rising at an alarming rate. Cats-and-dogs stocks have also started to move up. The new entrants may find it difficult to absorb the selling pressure, if any, from the satisfied strong holders."

Foreign institutional investors (FIIs) are on a buying spree even as domestic institutional investors have turned net sellers. The market will witness a correction the moment FIIs stop buying.

In July, FIIs purchased shares worth Rs 8,087 crore compared with domestic institutions, which were net sellers to the tune of Rs 2,012 crore. In the last three trading sessions alone, FIIs bought shares worth Rs 2,000 crore, while domestic institutions, including mutual funds, sold shares worth Rs 551 crore.

Meanwhile, global markets are doing well, with positive news taking the bourses up. Except for the fact that FIIs go on a vacation in August, there seems to be no other reason that can spoil the current bull rally.

On the domestic front, apart from the increasing open interest, all eyes will be on the Reserve Bank of India's (RBI) monetary policy review on July 31 and rising crude oil prices.

Crude oil prices are rising and may go up from the current level and reach $80 a barrel. India was able to manage the rise till date, owing to the strengthening currency.

The fast-increasing foreign exchange reserves have again started causing a problem of the rising liquidity as the RBI has to buy dollars from the open market to stop the rupee from appreciating further. In doing so, the central bank infuses more rupee liquidity into the system. Falling forward premia also suggest that the currency will only strengthen if the RBI does not buy the dollars.

Inflation is low and now the increasing liquidity is resulting in lower interest rates on short-term loans. The first quarter review of the monetary policy will set the trend for interest rates in the coming months. If the RBI takes any measures to suck the liquidity from the system, it will impact the equity market.

Overall, the first quarter results are on expected lines. Some fall in earnings is visible, but that was discounted by the market.

Last week, the Sensex rose 1.92 per cent and, in a month, it went up by 8 per cent, which is quite fast. The Sensex has consolidated between December and June. This is one of the longest consolidation phases during the last three years of the rally. In the last 12 months, the Sensex went up by a little more than 50 per cent.

Capital goods were one of the fastest-growing sectors with 98 per cent appreciation in the last 12 months.

On a monthly basis, metals outperformed the Sensex with a 13.86 per cent rise, while the small-cap index went up by 10.35 per cent.