Markets likely to continue wobble

The stock markets may well remain wobbly as they head into a new week, carrying over last week's confusion surrounding the proposed curbs on participatory notes (P-note). A a video conference between the Securities and Exchange Board of India and leading foreign investors after close of trade on Monday may, however, provide much-needed clarity and, hopefully, bring stability back to the markets, dealers said.

P-notes, an offshore derivative instrument which has Indian stocks as underlying, are issued by FIIs to anonymous overseas investors. More than 30% of the capital inflows into the country’s capital markets are through the P-note route.

Dealers said they anticipate further slide in stock prices judging by the recent frenzied rise in prices that made several stocks "excessive". Cues from the US, where the Dow lost 367 points on Friday, are also negative.

Proposals to curb rising inflows into stock markets through P-notes triggered a sell-off in the stock markets last week. Sensex, which had gained 36% since the lows of mid-August, corrected nearly 8% after hitting a record 19051.

Also, if the dollar continues to fall, one could see more inflows as foreign investors buy shares in India as a hedge against the US currency. The rupee closed at 39.74 against the dollar on Friday, down 0.06%. The currency has appreciated 10% since late 2006.

Second quarter results announced by many companies this week have not been very stunning, though they are in line with market expectations. Reliance Industries, India's most valuable company, posted 28% increase in net profit. However, software companies bore the brunt of the strong rupee as Infosys results failed to keep up with expectations'of analysts. The upcoming week will see other IT majors such as HCL and Satyam along with heavyweights Tata Steel and ITC announcing their results.

Sebi, at its board meeting on Thursday, will decide how to curb the $88 billion P-note investments. Foreign investors unwound Rs 14,000 crore worth exposures into stocks and derivative positions in the last three days. With the markets already absorbing the pain, some commentators expect Sebi to go ahead with the P-note move.

Deepak Parekh, chairman, HDFC, welcomed the P-note curb proposals, saying the huge inflows through the instrument were a cause of concern. "The BPO industry is operating at margins of 10-15%, which are pretty thin. Further, rupee appreciation will render several people jobless," he told reporters on the sidelines of a seminar on Friday.

Sashi Bhushan, head of equities at IL&FS Investsmart said: "There is some more pain left for the market. We will see stability at 16000-16500 levels. We could see some buying coming at those levels.”

Market participants also fear that margin calls may get triggered on Monday, if there is further unwinding of positions by FIIs. Margins calls are triggered when brokerage houses (and stock exchanges, in extreme situations) unwind their clients leveraged exposures in the market to meet margin requirements when prices fall sharply.