Before Taking Another Leap, Markets Take Breather

It seems that the Indian equity markets are taking a long breather after a brief sprint it witnessed in the preceding weeks. If investors could recollect ahead of the election results, the equity indices had witnessed a strong up-move. The indices opened gap up by around 1000 points on the election results day, however declined the similar day and closed with gains of 250 points. The trading sessions since then have been quite range bound.

While the trading sessions have been range bound, there was good amount of volatility amid that range. Further even the volumes have not yet declined. This is a clear indicator that the markets are just taking a breather and there is no selling pressure in the markets. It is just some profit booking happening in smaller lots. The Sensex yesterday closed at 24298 (Down 79 points or 0.32%) and Nifty closed at 7252.90 (Down 23 points or 0.31%).

Another important factor is the consistent flow of investment form the FIIs. Though there was some decline in the quantum of FII inflows, they hardly turned negative on any given day. Rather since the announcement of poll results the FIIs have poured more than Rs 6500 crore in Indian equities.

But ahead of the Government and Cabinet formation there are going to be some cautious moves by the markets. Further some amount of profit booking will also keep the indices under check.

As we have stated earlier, the situation is not going to change overnight and would take some time. There are few challenges like presenting budget with higher fiscal deficit and minimum resources to fund the same. Apart from that there is CAD worry and most importantly the inflation worries where the RBI is taking stringent actions. So there is going to be some time before everything falls in place.

On the CAD front some negative factor is, the Reserve Bank yesterday eased gold import norms by allowing select trading houses, in addition to already permitted banks, to procure the precious metal to boost exports. The Reserve Bank of India (RBI) in July last year had imposed severe restrictions on gold imports in order to check burgeoning current account deficit and sliding rupee. The central bank had tied imports with exports and prescribed a 20:80 formula. This facility was available to select banks only and other entities were barred from importing the metal.

While this has been the scenario on the domestic front, the European markets traded in green with good gains. US indices rose yesterday, rebounding from the previous day's broad sell-off, after minutes of the Federal Reserve's last meeting showed central bankers have discussed the eventual tightening of monetary policy but made no decisions on which tools to use. The Dow closed at 16533 which is almost a percentage point up. Even the S&P closed up by 0.81% at 1888.

Asian stocks rose for the first time in five days, with the regional benchmark index on course to snap the longest losing streak since January, after Federal Reserve meeting minutes showed policy makers see a muted risk of inflation from continued US stimulus. Nikkei is trading in green with gains of 1.50% and Hang Seng is up by 0.77%. Even the Shanghai Composite is up by 0,27%.

The SGX Nifty is trading at 7310 (Up 32 points or 0.32%). We expect the Indian equities to open on a positive note and then remain range bound in the first hours of trade.