Relief rally

Everything is not yet hunky dory with a Congress-led government

The stock, bond and forex markets staged a relief rally on Thursday, in the belief that the Congress will be able to form a stable government at the Centre. Shares clawed their way back into positive territory, bonds bounced off two-month lows, while the rupee recovered from a four-month low.

What's more, the Indian markets behaved very differently from other markets in Asia, where stocks fell across the region.

The rupee too appreciated despite the yen hitting an eight-month low against the dollar. And data from the stock market proved that the bounce was broad-based, with advances outpacing declines not only among the Sensex stocks but also in the BSE 500.

As Deena Mehta, managing director, Asit C Mehta & Co, explained, "Markets hate uncertainty, and it is the likelihood that a Congress-led government will come to power that caused the Sensex to bounce back yesterday."

But that doesn't imply everything's hunky dory with a Congress-led government, especially one that will be supported by the Left Front. Foreign institutional investors were, in fact, busy poring over the election manifesto of the Communist Party of India (Marxist), which is, to put it mildly, hardly pro-market.

"The new government could slow down the pace of reforms for the next 3-4 months. Hence the market could be range bound till then," feels Motilal Oswal, managing director of Motilal Oswal Securities.

The worry is evident in the way PSU stocks fell on Thursday-BSE's PSU index fell 2.77 per cent. PSUs that were scheduled to be privatised under NDA rule fell much more-while HPCL fell 7.2 per cent, Rashtriya Chemicals and Fertilisers fell as much as 15 per cent.

The PSU index has now fallen almost 10 per cent in the past week, compared to a 6 per cent decline in the Sensex. Importantly, traded volumes were very high and experts point that this could mean a lot of open positions were covered.

Turnover on NSE's cash market shot up to Rs 6686 crore, which is almost 60 per cent higher than the daily average for the rest of this month. In the derivatives segment, the number of contracts traded stood at 484365 contracts, which is the highest ever in the history of the markets.

Also, around 1.96 lakh index futures contracts were traded, which is the second highest traded volume ever in the history of the markets.

Compared with the number of contracts traded on Wednesday, this is a jump of almost 90 per cent. However, open interest increased just about 8 per cent, which means that much of the trades related to covering open positions. Very few fresh positions were created.

Also, the implied volatility in the Nifty options contract continued to be high at around 35 per cent, which obviously indicates that a great degree of uncertainty still exists. One area of uncertainty is relating to the pace at which reforms will continue.

Nimesh Shah, managing director, Parag Parikh Financial Advisory Services Ltd, says, "Markets could be range bound for the next few months-market players would be possibly watching the future direction of the reform process before making fresh investments."

But some experts feel that once the fascination with the elections and the formation of the government is over, the markets will start taking note of more serious issues like the jump in oil prices, the proximity of an interest rate rise in the US, and the slowdown in the Chinese economy, on which quite a few Indian industries are dependent.

Besides, the international markets are shaky, and in such a situation foreign investors get cautious regarding their overseas investments.

The point is that the future direction of the market could remain uncertain even after the formation of the government. But there is little sign of this now-in fact, Indian market players are switching to sectors such as IT, which are not affected by domestic politics.

The BSE IT index has remained flat over the last week, despite the 6 per cent fall in the Sensex. What's more, it gained 3.2 per cent on Thursday.

Currently, all that the election results have done is give a floor to the markets after the 400-point drubbing the Sensex got in the past week.