Market may extend gains; low volumes may cap upside

The uptrend on the domestic bourses may continue today with most Asian markets in the green. China's main index whose sharp drop late last month triggered a global flight from risk and sent equity markets tumbling -- hit an all-time high. Japanese markets were closed on Wednesday for a holiday.

US stocks rose on Tuesday, as a series of takeover deals bolstered investor confidence and offset apprehension about the latest Federal Reserve rate-setting meeting. The Dow Jones industrial average ended up 61.93 points, or 0.51%, at 12,288.10. The Standard & Poor's 500 Index closed up 8.88 points, or 0.63%, at 1,410.94. The Nasdaq Composite Index finished up 13.80 points, or 0.58%, at 2,408.21.

Volumes on the bourses have dropped over the past few days, partly due to a decline in FII volumes and partly due to advance tax payments. The call money rate at which banks lend funds to each other, jumped to 60% on Tuesday (20 March 2007), its highest since January 1998.

Daily volumes on BSE have dropped since the middle of March. It had hovered in 17.6 - 20.8 lakh shares a day from 12 March to 20 March compared to 22.94 - 29.57 lakh shares a day from 1 March to 9 March.

FII volumes as reflected in their daily gross purchases and gross sales figures have markedly declined in the past few days even as there lacks clear direction regarding their inflows. Gross purchases aggregated Rs 1056.60 crore and gross sales aggregated Rs 1306.50 crore on Monday (19 March 2007). Earlier in March, the daily gross purchases and gross sales figures fluctuated in the Rs 2000 crore to over Rs 3000 crore range.

At the net level, FIIs were net sellers to the tune of Rs 250 crore on Monday, the day when the Sensex had surged 215 points in a rally across Asian markets. As per provisional data released by NSE, FIIs were net buyers to the tune of Rs 147 crore on Tuesday (20 March 2007), the day when the Sensex rose 61 points in volatile trade.

The Fed's policy-making Federal Open Market Committee began its two-day meeting on Tuesday. The Fed is expected to hold its benchmark federal funds rate steady at 5.25%, but investors will focus on its statement on the outlook for the economy and future interest rate policy.

Back home, 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 six trading sessions are left before the expiry of the March 2007 contracts.

The next major trigger for the domestic bourses is Q4 March 2007 earnings, reports of which by corporates will start next month. 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.