Domestic bourses may track weak global equities

The market is likely to edge lower as Asian markets tumbled after another recessionary piece of US economic data sent Wall Street shares down nearly 3% on Tuesday, 5 February 2008.

Strong domestic liquidity may cap the downside. Liquidity may get a boost from huge refunds that investors are getting from Reliance Power IPO though it remains to be seen how much money comes to secondary market in the light of immense volatility witnessed on the bourses last month. Reliance Power, which raised a record $3 billion in its initial share sale in January 2008, said on Friday, 1 February 2008, it had begun refunding excess application money to investors. The initial public offer had received bids for $190 billion.

It also remains to be seen if the strong domestic liquidity will offset selling by FIIs. FIIs sold shares worth a huge Rs 13035.70 crore last month amid ongoing credit crisis in the US and in the backdrop of US recession fears looming large.

As per provisional data, FIIs bought shares worth a net Rs 311.78 crore on Tuesday, 5 February 2008. Local funds sold shares worth a net Rs 135.16 crore on that day.

FIIs were net buyers to the tune of Rs 62.24 crore in the futures & options segment on Tuesday, 5 February 2008. According to data released by the NSE, FIIs were net buyers of index futures to the tune of Rs 139.06 crore and bought index options worth Rs 276.26 crore. They were net sellers of stock futures to the tune of Rs 344.24 crore and sold stock options worth Rs 8.84 crore.

Even if the US goes into the recession, it may not impact India’s economic growth in a big way given that domestic demand is a key driver of the Indian economy. India’s economy is expected to post strong growth for a long period due to favourable demographics. Moreover a healthy investment cycle will continue to support India’s growth through a self-perpetuating cycle of income creation, savings and investment.

Corporate earnings growth remains decent. Deutsche Bank expects 20% compounded annual growth rate in earnings of 30-Sensex firms during the period from FY 2007 (year ended 31 March 2007) to FY 2009 (year ending 31 March 2009).

In Asia, key benchmark indices in Hong Kong, Japan and Singapore were down by between 3.5% to 5.6%. US stocks suffered their biggest drop in nearly a year on Tuesday, 5 February 2008, after data showed the worst monthly contraction in the services sector since the last US recession and Standard & Poor's warned it could cut bank credit ratings.

The Dow Jones industrial average plunged 370.03 points, or 2.93%, at 12,265.13. The Standard & Poor's 500 Index lost 44.18 points, or 3.2%, at 1,336.64. The Nasdaq Composite Index tumbled 73.28 points, or 3.08% at 2,309.57. The Dow and S&P 500 had their biggest drops since 27 February 2007.