Domestic bourses to track firm global markets

The market is likely to extend this week’s gains tracking firm global markets after the US Federal Reserve policy-setting meeting on Wednesday dropped an explicit reference to the possibility of taking rates higher in its statement, sparking talk the next move could be a cut. The Fed left interest rates unchanged at 5.25%. US interest-rate futures indicated a 48 percent chance of a rate cut by the end of June 2007, compared with 24 percent before the Fed's announcement.

The Dow Jones industrial average shot up 159.42 points, or 1.30 percent, to 12,447.52. The Standard & Poor's 500 Index jumped 24.1 points, or 1.71 percent, to 1,435.04. The Nasdaq Composite Index surged 47.71 points, or 1.98 percent, to 2,455.92.

Exporters led Asian stocks higher. Key benchmark indices in Hong Kong, Japan, South Korea, Singapore, China and Taiwan were up by between 0.4% to 2.1%.

Back home, it remains to be seen whether volumes accompany rise on the bourses. Volumes on the bourses have dropped over the past few days, partly due to advance tax payments. Daily volumes on BSE have dropped since the middle of March. It had hovered in 17.12 - 20.8 crore shares a day from 12 March to 21 March compared to 22.94 - 29.57 crore shares a day from 1 March to 9 March.

Foreign institutional investors (FIIs) turned buyers on Tuesday (20 March 2007), the day when the Sensex had risen 61 points tracking firm Asian markets. FIIs were net buyers to the tune of Rs 136.30 crore on Tuesday compared to a withdrawal of Rs 250 crore on Monday (19 March 2007). As per provisional figures, FIIs were net buyers to the tune of Rs 187.87 crore on Wednesday 21 March 2007, the day when Sensex had surged 240 points.

Volatility may rise over the next few days ahead of the expiry of the March 2007 derivative contracts next Thursday (29 March 2007). With the market scheduled to remain closed next Tuesday (27 March) for a public holiday, only five trading sessions are left before the expiry of the March 2007 contracts. The rollover has already started to April 2007 contracts from March 2007 contracts.

Nifty March 2007 futures settled at 3757 on Wednesday, a discount of 7.55 points over spot Nifty closing of 3764.55. Nifty April futures settled at 3752.80, a discount of 11.75 points over spot Nifty closing of 3764.55.

The next major trigger for the domestic bourses is Q4 March 2007 earnings, reports of which by corporates will start next month. Analysts expect Q4 results to be strong. Market men will closely watch what company managements have to say about the outlook for FY 2008.

The undercurrent on the bourses remains cautious due to high inflation and rising interest rates. Strong industrial production data released early last week makes a strong case for the Reserve Bank of India (RBI) to raise interest rates at its annual policy review for FY-2008 on 24 April 2007. Industrial output rose 10.9% in January 2007 from a year earlier. The wholesale price index rose 6.46% in the 12 months to 3 March 2007, up from the previous week's annual increase of 6.10% due to higher edible oil and naphtha prices.

The long-term India story remains intact. India’s long-term growth drivers are a favourable demography (large share of young population), robust domestic consumption and an acceleration in infrastructure creation