It is startling to see the change in sentiment one bearish week can cause. The Nifty dropped about 2.5 per cent, after a 20 per cent rise in 2012. But traders are suddenly talking knowledgeably about Greece, bank non-performing assets (NPAs), the large and rising deficits, Iran and the price of oil.
None of the problems are exactly new. They were visible last month and they are likely to be around for months to come, if not years. So, why focus on them merely because the market has moved in the 'wrong' direction for the past three or four sessions?
One immediate reason for the bearishness could have been the Multi Commodity Exchange’s (MCX) initial public offering (IPO) - locals pulled cash out of the secondary market to subscribe. The IPO sailed through. Without getting into the merits of the IPO itself, it would have received far less support if the Nifty had been trading at 5000.
The next three or four weeks are likely to see a considerable rise in volatility. Apart from all the potentially negative factors listed above, there's UP election results and of course, there's the Union Budget. Let's take a look at those two.
The trader's hisaab about UP results goes this way. Ideally, the Congress and SP will both gain at the expense of the BSP. Then the Congress will help the SP form the UP government. In gratitude, the SP will join the UPA at the Centre. This will give the Congress the requisite numbers to prevent Mamata didi's blackmail. Then the Congress will rapidly wheel out its reform agenda.
If the Congress and SP do actually end up in bed, the market will rise, for a while at least. It will drop if the BSP holds its ground. Even if the SP joins the UPA alliance however, it's doubtful that the UPA would implement reform, it lacks the will and energy, and it's too enmeshed in scams.
The budget brings another set of equations to the fore. In the teeth of a deteriorating fiscal situation, the government won't cut tax rates. The rising fisc could push it into raising taxes (income, service, excise and customs). That would hardly make the market enthusiastic.
But the run-up to every Budget features a lot of buzz and rumours that tend to make the market go up. Every industry body meets with the Finance Minister during the run-up and lobbies for sops - the meetings and the lobbying is always reported with optimism. On top of that, there are always rumours of income tax cuts, and excise exemptions, and so on.
The result is that the last 10 sessions or so leading up to the Budget are usually pretty volatile and tend to be on the bullish side. That enthusiasm rarely lasts even if the Budget meets expectations. The momentum fades because the positives have been factored into price by the anticipatory buying.
Quite often, Budgets turn into 'buy on rumour, sell on news' situations. The exceptions have been occasions when the FM has managed to pull off some unexpected, pleasant surprise. Given Pranab-babu's trackrecord and the UPA record in general, this is unlikely.
The historical data and the specific news flow both suggest that March might be a big swing month. If the market does go bullish, and stays that way post-Budget, we might see a 10 per cent climb. Conversely, if the market breaks down, it could lose the same sort of ground.
As of now, it's difficult to justify the current valuations in fundamental terms. Too many things have to go right while it would take only one out a long list of potentially bearish events to cause another crash.
This has been a liquidity-driven rally with the FIIs buying heavily. It's difficult to see the current prices being sustained if they change their stance. The DIIs and local operators simply don't have the deep pockets to absorb FII selling if it occurs on the same scale as it did in 2011.
That adds a further element to trading calculations. It's difficult to guess FII reactions to newsflow. Some of the inflows have come because India looks like a safer market than Europe at this instant so bad news on that front might not necessarily mean a crash.
An oil price spike will probably be a killer but the FIIs are unlikely to be bothered by UP elections results one way or another. A Budget that attempts fiscal consolidation would be badly received by DIIs if it meant higher tax rates. The FIIs might actually see that as a healthy signal!
