The market has moved from a steep rally to a steep fall over the past few days. But market players said this is just a trailer: the real test would come in March. Apart from the oil price movement, three events would determine the future — results of the state assembly elections, signals from the Reserve Bank of India (RBI) in its mid-quarter policy review and the Union Budget.
Analysts are keenly watching these events. Rakesh Arora, managing director, Macquire Securities said, “Market has recovered to the last 10-year average of 15x. Can it extend to 17x, the peak seen in recent years? We believe it depends on the government showing stomach for second generation reforms.”
The results in the five state elections would be the key in shaping the tone of the Union Budget. But views are divided on the way the UPA government is expected to react to it.
| STOCK-IN-TRADE Performance of major world equity markets | ||||
| Close on Dec 30,’11 | YTD % 2011 | Close on Feb 27,’12 | YTD % 2012 | |
| HANG SENG | 18,434.39 | -19.97 | 21,217.86 | 15.10 |
| NIKKEI 225 | 8,455.35 | -17.34 | 9,633.93 | 13.94 |
| NASDAQ COMP* | 2,605.15 | -1.80 | 2,963.75 | 13.77 |
| Sensex | 15,454.92 | -24.64 | 17,445.75 | 12.88 |
| FTSE 100* | 5,572.28 | -5.55 | 5,935.13 | 6.51 |
| DOW JONES* | 12,217.56 | 5.53 | 12,982.95 | 6.26 |
| *As on Feb 04, 2012 | ||||
Some believe if the Congress were to do well, especially in Uttar Pradesh, they would be able to push through reforms more aggressively. Others think doing not-so-well might actually force the hand of the ruling party to take strict policy measures. Arun Khejriwal, Kris Securities, said, “But if the UPA does not do so well, they will be quite aggressive in taking important measures.”
The key demands from the Union Budget are quite straight forward: Control revenues and expenditure, raise cash for infrastructure development and divestment.
On the other hand, RBI’s mid-quarter review of the monetary policy is not expected to throw up any major surprises. Few expect an immediate cut in policy rates. But market experts are banking more on the apex bank’s dovish stance and pumping in of more liquidity through another cut in the cash reserve ratio (CRR) — the amount that banks have to maintain with the apex bank. More so, because March will be a month of tight liquidity as advance tax will lead to outflows.
Many believe the recent rally is not on the back of strong fundamentals and the market is ‘living in isolation’. But foreign investors, who have already made net purchases of almost a $1 billion, believe things could be turning for the better. CLSA’s Mahesh Nandurkar in a recent report, wrote, “The government has certainly moved beyond the policy noise to some concrete steps. While still a few uncertainties exist, the direction is clear.
"India has been the best performing Asian market YTD and we believe the strong performance would continue as the liquidity driven rally is now getting the policy support and corporate earnings stability. Any initiative to improve coal production and power generation, we believe, will further increase our enthusiasm,” added Nandurkar
Foreign brokerage Morgan Stanley sees little reason to panic. “If this is a new bull market, there is little in their indicators to suggest that the end is near. There could be small corrections, but could go higher before a substantial correction emerges,” says the report.
Last year, the Indian stock markets felt the backlash of the European problem. But the country did itself no favours as there were policy flip-flops, such as in foreign direct investment in retail, lack of funds for infrastructure development and controversies in the telecom sector.
The run would get legs if domestic retail investors, who have been virtually absent from the equity markets for the last three years (FY10-12), re enter the fray. According to CLSA, in the last three years, with 0.2 per cent of incremental savings going into equities as against five per cent previously, a reversion mean (3.5 per cent average over the last eight years), could bring in $13-14 billion creating potential buffer for equity issuances.
