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Market Expected to be Range Bound – No Big Rally

September 8, 2012

The latest ECB decision on buying bonds cannot change the fundamentals of global economies overnight. Markets could benefit in the near term if we get a rally globally, however, we are skeptical on the sustainability of any sharp rally especially if we get a rise in global commodity prices. In fact, we are worried it could hurt India’s already fragile economy.

With the Government unable to move an inch due to political compulsions, India will likely overshoot the Budget target of 5.1%. With the Government struggling to hike diesel prices, an increase in oil prices globally could further hurt the fiscal deficit. Every $10/barrel increase in oil prices increases the fiscal deficit by 0.2% of GDP.

Failure of the first leg of Monsoon and the lack of will by the Central Government to check Cartelization of commodity brokers has rekindled the fears on inflation. However, inflation is closely co-related to global commodity prices and a rising oil price could see inflationary fears making it difficult for RBI to ease rates.

Reforms Central for Rally to Sustain
The current weakness in the economy (and consequently earnings) will only be reversed if the Government takes immediate measures to improve business confidence and boost infrastructure investments. While there is a heightened sense of urgency in the Government, market expectations too have increased lately.

Thus in this context we continue to expect Indian Stockmarkets to remain range-bound with a weak economy, earnings and reasonable valuations providing an upper cap to markets. Stock specific action is already being exhibited by the market rather than broad based.

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