Market may recover as oil drops

A pull back in oil prices may provide some reprieve to Indian stocks buffeted by inflation fears. After hitting a record high of above $143 per barrel on Monday, 30 June 2008, oil prices pulled back to settle near $140 a barrel. However, subdued trend in Asian stocks and political uncertainty may cap gains. The market will also today watch data on monthly sales that will released by auto and cement firms to gauge the impact of increase in retail fuel prices on the economy. The auto sales figures for June 2008 will also reflect whether consumers are deferring purchases due to fears of further rise in interest rates.

Market’s concerns are that the rise in input costs and tough macro economic environment comprising high inflation, record high global crude oil prices and rising interest rates, will result in slowdown in earnings growth of the corporate sector. Nevertheless, advance tax payment by the Indian corporate sector this year so far has been strong. Government’s direct tax collection from the corporate sector rose 39.81% to Rs 30655 crore until 21 June 2008 compared to the corresponding period last year.

Political uncertainty continues to haunt the bourses. The media continues to speculate whether the ruling Congress led United Progressive Alliance government will be able to push through a much-debated Indo-US nuclear deal and still retain its power, in the face of heavy opposition from its key communist allies. The Left parties on Sunday, 29 June 2008, renewed their threat to withdraw support from the ruling coalition if Prime Minister Manmohan Singh forged ahead with the nuclear deal. Singh on Monday, 30 June 2008, promised to bring the nuclear pact with the US before parliament before going ahead with the deal that is fiercely opposed by his communist allies, a report said.

The Prime Minster played down the communist's threats to withdraw support to his government saying all that he wanted was that the government should be allowed to complete the negotiation process with the International Atomic Energy Agency-IAEA and Nuclear Suppliers' Group-NSG. Singh expressed confidence that the government would be able to address concerns of all including the Left parties on the civil nuclear cooperation agreement with the US

For the stock market, the political uncertainty pertains to whether there will be stability at the centre if mid-term polls are held i.e. whether the new government will complete five years and whether the new government restarts economic reforms process which has virtually come to a halt in the last two years or so.

Sustained selling of Indian stocks by foreign institutional investors (FIIs) has also dented market sentiment. As per provisional data, foreign funds sold shares worth a net Rs 208.66 crore on Monday, 30 June 2008. FII outflow in June 2008 totaled Rs 10095.80 crore (till 30 June 2008). FII outflow in calendar year 2008 totaled Rs 25465.30 crore.

Meanwhile, according to a recent Citigroup report, equity valuations in India have become attractive after a steep fall.