Market may lose further ground

The market may extend losses after last week’s setback caused by FII selling due to official attempts to moderate inflows. Stock market regulator Securities and Exchange Board of India (Sebi) is expected to take a decision on 25 October 2007 on its proposal to partially curb participatory notes, an instrument used by foreign investors to buy Indian shares without being registered with the regulator.

Volatility is expected to remain high ahead of expiry of October 2007 derivatives contracts on Thursday, 25 October 2007.

The major Q2 results scheduled next week include Satyam Computer on Tuesday, 23 October 2007, Cipla and Dr Reddy’s Lab on Wednesday, 24 October 2007, Bharat Heavy Electricals on Thursday, 25 October 2007 and Tata Steel, L&T and ITC on Friday 26 October 2007.

Other key results next week include Reliance Capital, Ideal Cellular, Oriental Bank of Commerce, Indian Hotels, Punjab National Bank, Nicholas Piramal India, India Cements, Suzlon Energy, Britannia Industries, ABB.

FII selling hit the bourses, last week, following Sebi’s proposals to clamp down FII inflow through the participatory notes (PN) route. After trading hours on Tuesday, 16 October 2007, Sebi issued draft proposals wherein the market regulator proposed restriction on use of the popular participatory notes (PNs) route of FII inflow and it also recommended unwinding of some PNs within 18 months. PNs are financial instruments used by foreign investors that are not registered with Sebi, to invest in Indian shares. FIIs and their sub-accounts buy Indian securities and then issue PNs to foreign investors with these securities as the underlying.

Given the large scale of the aggregate PN holding relative to new flows, even a partial unwinding of positions can put considerable pressure on stocks such as Reliance Energy, Reliance Petroleum, ONGC, IndiaBulls Financials, IndiaBulls Real Estate and Axis Bank which have had a significant run-up in the past few weeks or have high share of PN in their foreign holding, brokerage CLSA said in a recent note.

Further, analysts reckon that with restriction on participatory notes, the near term FII inflow may be affected given that the participatory notes contributed substantially to FII inflows on the bourses over the past few months and it will take some time for the FIIs currently using the PN route to get registered with the market regulator.

Franklin Templeton Investment (FTI), which operates one of the leading mutual funds in India, however, feels that inflow to India from long-term global investors will not be impacted due to these measures given that India’s economic and corporate fundamentals remain robust. India’s economy is expected to post decent-to-strong growth for a long period of time mainly due to favourable demographics.

Domestic liquidity remains strong. Insurance firms have been channelising money raised through unit-linked insurance plans (with a high weightage for equities) into the markets. A sharp correction, if any, may lead to bargain bunting by domestic mutual funds which are said to be sitting on a cash pile of about Rs 14000 crore.

The near term trigger for the market is RBI’s Mid Term Review Of Annual Policy due on 30 October 2007. It remains to be seen whether the central bank does away with a hawkish stance in the policy. However, a near term rate cut by RBI looks unlikely given that consumer price based inflation and liquidity remain high.

Meanwhile, a meeting of the panel set up by the government to look into Left front’s concerns over the Indo-US nuclear deal holds its fifth meeting on Monday, 22 October 2007.

Congress which earlier appeared quite firm and keen on operationalisation of the nuclear deal seems to have now softened its stand which has helped fears of mid-term polls receding. This was evident when party president Sonia Gandhi stated recently that she doesn’t want early election. Gandhi said that the Left parties, which were opposing the deal, were not being unreasonable, and that the government was not looking for a confrontation with them because that was not the "coalition dharma."

Left front which is supporting the government from outside has been against operationalisation of the nuclear deal with the US, which had caused a rift between the government and the Left front. There had been fears that possibility of an early election could see the government announcing populist measures that would widen the fiscal deficit.