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Inflation concerns for D-Street on higher crude oil, freight prices

Any upsides in the Nifty from current levels can only be brought on by positive developments in terms of pre-Budget policy announcements

Sneha Padiyath Mumbai
Fears of higher inflation are likely to weigh heavy on equity markets, on account of rising crude oil prices and the railway fare increase.

Shares are likely to open lower on Monday after the railway fare rise late Friday evening. Rising crude oil prices could add to the weak sentiment as the conflict in Iraq deepens, stoking concerns about inflation on account of a possible disruption in oil supplies, say experts.

The 7,480-levels will be a key support for the Nifty, said analysts.

"The fare hike might put immediate pressure on stocks of bulk sectors like cement and power. Over time, we could see a trickle-down across all the sectors, shaving off share prices substantially," said Arun Gopalan, vice- president (research), Systemix Shares and Stocks.
 

Power companies would be affected because it would cost more to transport the coal required for electricity generation. Cement companies transport nearly 40 per cent of their produce through rail. Cost for both will rise with the increase in freight rates.

Meanwhile, analysts foresee crude oil prices touching the $120-mark sooner than later, resulting in a higher subsidy burden for the new government. Continuing the trend seen last week, oil and gas shares are likely to remain under pressure in the coming week as well, as crude oil prices remain stubbornly high.

"Till the time worries on Iraq continue, stocks of the downstream and oil marketing companies will be under pressure. Oil and Natural Gas Corporation Limited (ONGC), in particular, could be seriously impacted because of the heavy subsidy burden," said Dipen Shah, senior vice president (research), Kotak Securities.

Last week, the oil and gas sector was among the worst performers on account of higher crude oil prices. Brent crude closed at $115/barrel on Friday. The sector was down two per cent even as the BSE Sensex and NSE Nifty ended the week lower by 0.5 per cent. The BSE's Sensex closed at 25,105, while NSE's Nifty ended 7,511.45.

Any upsides in the Nifty from current levels can only be brought on by positive developments in terms of pre-Budget policy announcements, while downsides would likely be dictated by the situation unfolding in Iraq, said analysts.

Market participants are also likely to keep a keen eye on the rupee. Higher dollar demand as crude oil prices move up could see the rupee depreciating from current levels. Analysts expect the rupee to slide to 61.50 to the dollar in the week ahead.

Shares of the technology and health care sectors could benefit from this decline in the currency, said analysts. However, they act as a headwind for foreign investors putting money into India, since a falling rupee erodes the value of their assets.

Foreign investors were net-sellers of equities for Rs 220 crore for Friday, making them netsellers by Rs 405 crore for the week. This comes even as domestic institutions were netsellers at Rs 410 crore.

Also, the US Federal Reserve the past week further trimmed its bond-buying programme by $10 billion bringing it down to $35 billion of monthly asset purchases. The programme has been a key driver of foreign flows into markets including India. Asian markets had reacted negatively to the news, spooked by talkabout higher interest rates in the US by the end of this year.

"Fed meeting participants did creep up their interest rate expectations for 2015 and 2016 and as Janet Yellen (US Federal Reserve chief) points out, the key will be what happens to the data. Our view remains that the first Fed rate hike is still 9-12 months away, but we are likely to see more focus on this in the months ahead, particularly if US economic data remains solid," said Shane Oliver, head of investment strategy and chief economist, AMP Capital.

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First Published: Jun 22 2014 | 11:28 PM IST

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