Indices Likely To Extend Losses

Sometimes we feel the markets are behaving irrationally. But we need to understand the markets behavior is always rationale, it is our expectation about the market which May be irrational. Similar thing happened yesterday as the Indices took a nosedive when everyone expected it to witness an up-move. At least the global cues were suggesting so. Yesterday the markets opened Gap up, however it could not sustain the levels and immediately entered the negative zone. The reason was clear, with the US Fed announcing a start of the QE Taper; it is likely that the FIIs would now take a safety flight back to the US markets. With Indian markets mainly driven by abundant liquidity now, the outflow of funds would affect the markets significantly.  As a result broader indices witnessed a down ward movement with Bankex and Realty being the biggest losers. We had expected the markets to sustain the higher levels as the tapering at USD 10 billion was lower than the expectations of USD 15 billion.

Today, there are two major developments. First is the sweet deal for the sugar manufacturers to the tune of Rs 6600 crore. Here the government has announced to provide interest free loans to the troubled sugar companies. This will provide a boost to the sugar companies which are witnessing problems as the minimum support prices are higher making it financially un-viable to produce sugar. We feel, though the Sugar mills would be benefited it is a clear political play. We feel the interest free loans would add to the pressure on banks which are already reeling under the NPA pressure.

Apart from that the Cabinet yesterday decided to allow Reliance Industries to almost double the price of natural gas from April 2014, provided the firm gave a bank guarantee to cover its liability if gas-hoarding charges are proved. The bank guarantee, which will be equivalent to the incremental revenue that RIL will get from the new gas price, will be en-cashed if it is proved that the company hoarded gas or deliberately suppressed production at the main D1&D3 fields in the eastern offshore KG-D6 block. We feel, it would be a positive for Reliance Industries which has witnessed a range bound movement in the past one year. However the gas based power companies would get negatively affected.

While this is the scenario on the domestic front, the global cues are not very clear. The European markets rallied yesterday owing to the Fed move on the taper front. But the US markets remained range bound and closed marginally in positive zone. The S&P 500 and NASDAQ however closed in marginally negative zone.

As for the Asian markets, ahead of the Bank Of Japan meet the Asian indices are bit cautious. While the Nikkei is down half a percentage point, Shanghai is trading with miniscule negative bias.

So the Asian cues are not very conducive for the Indian markets. With lack of cues on the domestic front also, the Indices are likely to open on a weak note and then the markets would witness a range bound