Markets plunge into the red zone yet again

After a brief positive rally seen last week, the markets have yet again plunged into the red zone. The week started off on a subdued note, as investors waited keenly for clarity from the govt. on its much-anticipated retail FDI policy. However, the govt.'s decision on Dec 8, 2011 to withdraw the multi-brand FDI policy and go ahead with the single-brand policy didn’t manage to cheer investors, who decided to send the markets plunging south. Domestic as well as foreign investors seem to have lost trust in the govt. and its methods of handling key policy decisions and reforms.

There were also some good triggers in the market, which missed capturing investor fancy to a significant degree. Food inflation for the week ended Nov 26, 2011 cooled down further to 6.6% as against 8% in the previous week, giving rise to the hope that the RBI might take a pause in its rate hike campaign in Dec 2011. In fact, inflation has been showing clear signs of abating post the festive season, and may come well near the RBI’s comfort zone, if not within it.

On the global front, despite the US jobless claims coming to a 9 month low, the ECB cutting down its interest rates to record a low of 1% and Chinese inflationary pressures showing signs of abating, the situation on the global front continues to be gloomy. There seems to be no clarity from the Euro zone with regard to the depth of the crisis and the measures taken by the leaders to tackle it. However, one positive development amidst all the negative news flow is that oil futures have tumbled down by nearly 2% this week, with the Nymex falling below the US$ 100/barrel level on expectations of a demand slouch led by recessionary pressures in the US and Europe.

Wth some minuscule yet significant positive news flows coming from the Euro zone summit in Brussels, we expect much-needed clarity to settle in by next week. However, it would be too premature to take a stance on the outcome at present.

Back home, the rupee plunged to Rs 52.06 levels, as the markets bled this week. Last week, the rupee climbed back to Rs 51.43 per dollar on account of some pullback in the markets. FII net investments in the equity markets stood at Rs 307.8 cr for the 2nd week in a row, with the Dec 2011 net FII investments standing at Rs 1343.4 cr – another positive development ignored by the market.

Moving on, the IT index was the lone positive performer among the sectoral indices this week. The industry body, NASSCOM, maintained its positive growth projections for the sector, cheering investors. The Capital Goods index was the biggest loser – investors shunned stocks in this space over reports that the Indian industrial output for Oct 2011 may have plunged into the negative territory, led by dismal performance in the Capital Goods sector.

The interest rate-sensitive BANKEX fell on profit booking as investors cashed in on recent gains on the back of speculation that RBI might pause further rate hikes. ICICI Bank, India's largest private sector bank by net profit, fell 7.12% to Rs 731.55. HDFC Bank fell 4.50% to Rs 444.80. SBI, India's largest bank by net profit and branch network, declined 1.20% to Rs 1863.95.   The Metals Index also declined, as prices of industrial metals fell globally. Sterlite Industries was down 7.35% to Rs 101.40, Coal India was down 5.31% to Rs 316.65, Tata Steel was down 4.92% to Rs 398.25 and Hindalco Industries was down 2.48% to Rs 131.95. Despite posting a good set of growth in Nov 2011 auto sales, the Auto Index plunged by 3% this week.

Among the prominent losers, IB Real Estate was down by almost 19%. This was over concerns that the company's valuations may drop, following a proposal to demerge its power and infrastructure business into a separate holding company called Indiabulls Infrastructure and Power (IIPL). Pantaloon Retail was down by almost 15% for the 2nd consecutive week, as the govt. rolled back the multi-brand retail FDI bill. CESC was another such victim, as and was down by 11.62%. Aviation major, Jet Airways, slumped further by 9.05% this week, as the aviation industry continues to struggle.

Amongst the gainers, UB gained a massive 15.43% this week on the back of some unusual volumes reported by the stock on the bourses.

In conclusion, we expect the coming week to be very volatile, as investors and traders in the market start building up towards the RBI’s monetary policy review on Dec 16, 2011. All eyes will now be on the headline inflation data and the industrial output data expected next week, both of which could provide some vital cues on the RBI’s possible stance. Going by the Q2 GDP growth of 6.9%, which shows a clear sign of slowdown in the economy, coupled with a cooling off in inflation, we expect the RBI to take a pause in its monetary stance on in Dec, and adopt a dovish approach thereon.