Focus on US Fed meet, tax figures

MARKET WATCH

The market is in a profit-booking stage. The US Federal Reserve's meeting on September 18 is expected to set the trend for the global markets. Domestic triggers for the next week may also come from advance tax figures, which are expected to be higher, indicating optimism over the growth in earnings.

The US Fed is expected to cut the rate by 50 basis points at the next week's meet. The market may react adversely if the rate cut is lower. In any case, US subprime woes are far from over, according to an Indian head of a large FII.

He points out that the US commercial paper (CP) market is drying up and investors are not renewing or willing to put more funds in the commercial paper. He believes that US corporates will soon a find major source of short-term finance drying up, with a downturn in the $2 trillion US commercial paper market. Speculation in the US market is rife that the Fed will find it difficult to control recessionary trends.

Since the last few days, market players are discussing whether the Indian market is decoupling from Western markets as it went on rising even as markets in the US, Japan and elsewhere fell. The Indian market has a negative correlation and hence FIIs are buying, says Nirmal Jain, chairman, India Infoline.

FIIs purchased shares worth Rs 3,476 crore from the secondary market in September alone. "How long the trend will continue is not known as the Indian market is decoupled as of now. But if subprime-related problems keep on emerging, the Indian market cannot remain decoupled," said Vibhav Kapoor, group chief investment officer, IL&FS.

On Friday, British bank Northern Rock declared more losses due to the subprime crisis, which led to the Bank of England approving emergency funding to enable the bank in overcoming the liquidity crisis. The Indian market went down following this news and challenged the theory of decoupling.

Meanwhile, FIIs are a divided lot on India, with some going overweight, while others are cutting the India rating to underweight. Given the situation, the role of domestic institutional investors will be crucial. If for some reason, the FII investment dries up, will domestic funds be in a position to repeat the role they played in August, when they were big buyers even as FIIs deserted the market?

Many mutual fund managers are sitting on cash. Nilesh Shah, deputy MD and chief investment officer, ICICI Prudential, says, "We are bullish about India's growth story. We generally keep 5 per cent cash. Currently, our cash level is around 7-8 per cent." Many other funds too have surplus liquidity, point out analysts.

On Friday, the Sensex was less than 100 points away from its all-time peak, when the selling spree began, washing away the day's gains. This indicates that the previous day's high is acting as strong resistance and the market may remain choppy, with the upside likely to be capped by overseas cues.