Expect A Range Bound Trade

Indian equity markets remained quite volatile in the preceding fortnight. Reason was quite simple, while profit booking resulted in Indices witnessing a decline, the consistent inflow of FIIs helped the markets revive and sustain higher levels. We have been consistently focusing on the fact that FIIs have been quite bullish on Indian equity markets as it is seen as a good house in a bad neighbourhood. To quantify, in 2014 (on YTD basis) FIIs are net buyers to the tune of Rs 30895 crore. A chunk of money has arrived in the last two months it-self. With such an inflow and liquidity it is no wonder that the indices managed to sustain its higher levels.

However while the inflows have been good, there were few issues that are likely to affect the Indian equity indices. First and foremost factor is possible below average rains and emergence of possible El Nino effect. The Indian meteorological department has stated that the monsoon might be below average and there might be some shortfall of rain. If investors could recollect we have been consistently worried about the inflation and any shortfall in monsoon could affect the food prices adversely. If that happens, we feel the CPI inflation which is currently expected to come below the comfort levels of RBI, may shoot up again. This would ultimately restrict the ability of RBI to reduce the interest rates.

Currently the market participants are all in a mood of expected political outcome of the general elections. However we feel one now needs to think beyond that. It is true that election results do make an impact on the equity markets, but on the hindsight it is usually short lived and eventually the markets catch up with the fundamentals. A similar thing happened in 2004 and 2009 as well. After the knee jerk reactions to the poll outcomes the markets followed fundamentals then. Hence, we feel when the new government is formed, the first challenge for them would be containing inflation. 

How efficiently the government manages the same needs to be seen. On the domestic front there is another factor which has kept the investors busy, the India Inc corporate results. The results season has been good till date with most of results being on expected lines. Best part is there are hardly any negative surprises.

While this has been the story on the domestic front, the earnings season has also been good in the US markets. It was the strong earnings that helped the US equities sustain higher levels. However the re-emergence of Ukraine and Russia issue may act as a spanner in the wheel. Just to put the things in perspective, recently, the United States froze assets and imposed visa bans on seven powerful

Russians close to President Vladimir Putin and also sanctioned 17 companies in reprisal for Moscow’s actions in Ukraine. A U.S. official stated in an announcement that European leaders were also considering more measures to punish Russia. This may be a negative factor on the global front.

In the coming week there are few larger events lined up. After the announcement of FOMC meet (yet to be announced as the magazine was sent for print) the focus would be on macroeconomic factors in India. The next fortnight would see announcement of HSBC India Services PMI and IIP data. As for markets, we are expecting a range bound trading sessions. DS Performance Of Indices