Weekly Newsletter - July 28 2008

With the political storm behind us and talk of reforms making a comeback, the bulls may continue to make headway next week as well. What's encouraging is that global markets are largely holding up, amid a steep fall in oil prices. The monsoon, which had a prolonged lull over the western and southern parts, also seems to be on a revival path. A sustained rainfall across the country will help boost kharif output, and will lead to some softening in food inflation. On the flip side, deficit rainfall will hit agri production, and thus could lead to further spikes in food prices. Inflation, at the moment looks to have peaked out, though reports suggest that steelmakers and auto companies may go for another round of price increases. Quite a few results have been reported and barring a few negative surprises most are in line with expectations, which in itself were quite low. Margins across the board are under pressure and are likely to remain so for a while. The next big trigger will be the RBI's quarterly policy review on July 29. The central bank is likely to announce more tightening steps as inflation remains near 13-year high. Falling oil prices could make the RBI tone down its hawkish stance though, which should cheer the bulls. On the whole, we are in for a short-term upturn in sentiment. But, one should ride it carefully, as the risk-reward in the short- to medium-term is still unfavourable.