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One way of viewing the stockmarket is as an unending battle between bulls and bears. Bulls provide the demand and bears provide the supply. If demand exceeds supply, the bulls force prices up while, conversely, the bears pull prices down when supply overwhelms demand. In those two cases, price trends develop.
If the two sides are approximately evenly matched, there is little net change in share prices. But there can be a lot of volatility concealed under the surface calm if the bulls gain an upper hand in one session and bears win the next.
This is what is happening at the moment. In the past 15 sessions, the Nifty has seen five swings of over two per cent. These have tended to go in opposite directions and, more or less, cancel out. The foreign institutional investors (FIIs) increased their commitments to India considerably in May, buying a net Rs 14,000 crore (versus Rs 4,600 crore in April). But the domestic institutional investors (DIIs) also became more bearish - DIIs sold Rs 12,000 crore in May (versus Rs 3,000 crore in April).
As a result, the market has been oscillating in a range of Nifty 5,950-6,225 points. Other global markets have seen similar levels of intra-day volatility in the same period, and the US and Japan are both close to 52-week highs, as indeed is India. US jobs data was weak. German jobs data was weak. Nevertheless the US markets rose last week.
To my mind, this lack of a trend accompanied with high short-term volatility is a sign that nobody has a clear road map. It is often typical "topping" behaviour when a market is near a historic peak. It seems traders and investors are seizing upon available news flow and punting short term. Since everyone lacks confidence in their views, they all immediately reverse positions at the first signs of prices moving in an adverse direction.
This may be a simplistic way of viewing things, but, indeed, there seems to be little clarity at the moment. As far as traders are concerned, there could be a drying up in global liquidity if the US decides to cut back on quantitative easing (QE). Japan's new Abenomics-inspired easing will compensate to some extent, but it will also change the nature of global asset allocation.
Surplus liquidity flows to equity will see sudden and dramatic changes as and when there is a cutback in QE. There would also be an impact on the US Federal Reserve's balance sheet as yields would climb on its holdings of US securities if it cuts QE. Estimates of capital losses of close to four-five per cent of the US GDP are being bandied by the International Monetary Fund no less. There would be an impact on other central bank balance sheets as well.
Meanwhile, the dollar climbs and the yen falls. The rupee has been hit hard by the rising dollar. The uptrend of the dollar could get stronger as well. The rupee is still slightly over-valued, going by the Reserve Bank of India's (RBI's) real effective exchange rate calculations. Since trends rarely close at fair value, it is possible that the rupee will end up under-valued. The RBI could and will intervene at some stage. But it is more likely to try and smooth the fall, than blow reserves trying to reverse the trend.
A falling rupee could, in the long run, help export competitiveness and reduce the current account deficit by making discretionary imports expensive and reducing demand for these. In the short run, it lights a fire under corporates with external commercial borrowings (ECBs) due for repayments this financial year. It also leaves the RBI with little option but to hope that crude prices continue to rule low. A considerable draw-down of India's forex reserves is likely this financial year. Things will get really interesting for dollar-rupee traders if there are external corporate defaults.
There were no big surprises in the preliminary macro-economic data released last week. Indian gross domestic product (GDP) apparently grew 4.8 per cent in January-March 2013, and by five per cent last year. The Fisc is believed to have dropped to 4.9 per cent.
As usual, the revisions further undermined whatever little credibility existed for Indian government statistics. It seems the fourth quarter of 2011-12 saw the GDP growth at 5.1 per cent, a mere 1.4 percentage points lower than the claimed preliminary estimate of 6.5 per cent. Also, instead of a positive trade balance of Rs 48,000 crore, there was a negative trade deficit of Rs 130,000 crore in the quarter.
It is entirely possible that Q4 2012-13 numbers will also be revised down drastically next year. Certainly, key consumption indicators like air traffic (down nine per cent in Q4 2012-13) and automobile sales (down seven per cent the full year), suggest consumption has dwindled. Investment didn't exactly seem to be booming either in the fourth quarter of 2012-13. But the market will have moved on by then.
The RBI's next policy review in mid-June will now be the next domestic trigger. It's likely that the central bank would continue to cut rates despite the pessimistic public pronouncements of the governor. The monsoon will, of course, influence decisions either way, but, so far, the signals are positive. If the RBI does cut the repo rate, even by the minimum 25 per cent, the market will probably be happy. If it doesn't cut, there could be a negative impact on sentiment, and that could trigger a big downtrend.
At the moment, there is no clear short-term trend, but, as noted above, there is plenty of session-specific volatility. The technicians will be waiting for either a climb above 6,225 (confirming that the bull market continues), or a fall below 5,750, (suggesting the party's over).
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
