Sustained FII selling may keep sentiments weak

Sustained selling by foreign funds, rising inflation, high crude oil prices and political uncertainty will weigh on the sentiment of the investors in the near term. However, expectations of good Q1 June 2008 results may trigger a recovery from lower level after a recent steep fall in share prices. The two key indices – BSE Sensex and Nifty – struck their lowest level of calendar 2008 on Friday, 20 June 2008.

The government’s advance tax collections are estimated to have grown at close to 40% in the April-June 2008 quarter. Advance taxes are a good indicator of the corporate India’s profitability and healthy collections reflect the bottomline growth. Companies have to pay advance tax in four installments – the first, accounting for 15% of the estimated tax liability for the entire year. The government has received the first installment of the advance tax for corporate taxpayers by 16 June 2008.

Reserve Bank might intervene to contain inflation, which reached highest level in 13 years early this month. The wholesale price index rose 11.05% in the 12 months to 7 June 2008, government data released on Friday, 20 June 2008, showed. The rate was above market expectation of about 10% rise. The reading was the highest in 13 years since 6 May 1995, when it was 11.11%.

The quarterly monetary policy review of RBI is scheduled on 29 July 2008 but it may take a call much earlier with inflation hitting the roof. Reserve Bank of India had on Wednesday, 11 June 2008, hiked repo rate by 25 basis points to 8% with immediate effect in an effort to contain rising inflation.

A further hike in rates would impact bottomline of Indian companies. Also high interest rates may delay expansion plans of corporates, which in turn may impact future earnings growth.

Rising crude oil remains a major worry as India imports close to 70% of its crude requirements. US crude for July delivery settled down $4.75, or 3.48%, at $131.93 per barrel on the New York Mercantile Exchange on Thursday, 19 June 2008. The oil price has surged about 40% in this calendar year so far.

The market will closely watch the policy statement of the US Federal Reserve to gauge the outlook on US interest rates. The Fed is widely expected to keep interest rates unchanged at its two-day meeting on 24 June 2008-25 June 2008.There had been speculation that the Fed may start lifting interest rates steeply as soon as August 2008 to rein growth in prices. But such expectations were trimmed after a series of media reports earlier this week cast doubt on how aggressively the Fed may raise rates this year, and whether the central bank will boost rates in the near term.

Political uncertainty may continue to haunt the bourses. As per reports, CPM, a key left party, may be working on a plan to pull out support to the Congress-led UPA government at the Centre. Left parties have threatened to pull support to the government if it took further steps on the Indo-US nuclear deal. Left parties are opposing the agreement, saying it undermines India's independent foreign policy and nuclear weapons program.

A good news is that the June-September southwest monsoon has been 45% above average so far this season. Rainfall in the four-month rainy season this year will be near-normal, or 99% of the average between 1941 and 1990, the weather office had said in April 2008. The department classifies rainfall as near normal when it's between 96% and 104% of the 50-year average. Good rains will bolster farm production which in turn may help rein in inflation.

Foreign institutional investors (FIIs) have pressed heavy sales of Indian stocks this month in the backdrop of a weakening rupee against the dollar. In June 2008, FIIs dumped shares worth Rs 7,125.20 crore (till 18 June 2008). FII outflow in calendar year 2008 totaled Rs 22,494.60 crore (till 18 June 2008). On the other hand, mutual funds were net buyers of shares to the tune of Rs 1,919.90 crore in the month of June 2008, till 18 June 2008.