Inflation compounds Street woes

MARKET WATCH

The stock markets seem to have entered a volatile zone. On Thursday, when the Sensex rose 470 points, investors felt the worst was over. But, the 164-point fall of the index on Friday showed the fragility of the rally.

When the Sensex touched 14,000 for the first time in early December, most analysts felt that investors should now look at small- and mid-cap companies. On many occasions in the last three-and-a-half months, the rise in small- and mid-cap indices was faster and the fall lower compared with the Sensex.

On February 1, the mid-cap index was 5,775.42, the small-cap index 6,718.74 and the Sensex 13,844.78 points. From those levels, the Sensex is down 7.5 per cent, the mid-cap index down by 9.5 per cent and the small-cap index down by 7 per cent. There are no indications that small- and mid-cap indices will fare better. The mid-cap index had performed the worst rather.

Meanwhile, scrip-specific investors may have earned better despite the fall, but generally, small investors do not have the expertise to find out such scrips.

If we look at the scrips listed during the week, only MindTree and Idea traded at a premium to their issue prices, while the others traded at a discount, indicating that the days of any Tom, Dick and Harry getting away with aggressive pricings are over, at least for the time being.

The volatile week was mainly dented by local factors, with the government playing spoilsport, despite worries related to the unwinding of the yen carry trade subsiding globally.

First, the government asked steel companies to roll back the prices and then pressured cement companies on the price front. A Hong Kong-based fund manager said, "Such actions send wrong signals and uncertainty is created over any action taken by corporates."

He argued that the pricing power was currently with the industry, as capacities were lower than the demand and such a scenario was projected a few years ago. New capacities would come up in the next couple of years and "till then the pressure may prevail", he added.

Meanwhile, many fund houses are still cautious about the near-term trades. Though global factors have returned to worry in the last few days apart from the government's approach, inflation worries still remain, as the latest data show that inflation is more than 6 per cent.

Interest rates in India and in the Euro zone are on the rise. If Japan raises interest rates further or if the yen rises again, even investments that are not part of carry trade may flow back to Japan.

Many sectors such as cement, construction, IT and property, which looked very good even when valuations were at their peak, were downgraded by analysts recently.

The future hinges on to what extent inflation-related worries will let the market down and the global cues. Next week, advance tax cash outflow will also play its role and mutual funds will have to provide for dividend payments. Advance tax liability will depend on whether any profit is left or washed away in the recent fall.

During the week, the NSE announced that its 26 per cent FDI quota was bought out. The BSE also announced the SGX deal and the stock exchange's futures volume peaked to Rs 1,000 crore for the first time.

The FDI guidelines for stock exchanges are showing results faster than envisaged. Such norms for commodity futures are eagerly awaited, even as the government is sitting tight.