Volatility may rise ahead of derivatives expiry

The market may remain under pressure next week after inflation recorded fastest rise in more than 16 years in early August 2008, increasing the likelihood of the Reserve Bank of India (RBI) raising interest rates again.

With no major key events scheduled in the forthcoming week, the market will closely watch global stock market cues. But it may turn volatile on account of expiry of August 2008 derivatives contracts on Thursday, 28 August 2008.

The wholesale price index rose 12.63% in 12 months to 9 August 2008, above the previous week's annual rise of 12.44%, government data released on Thursday, 21 August 2008, showed. Inflation for the week ended 14 June 2008 was revised upwards to 11.80% from 11.42%.

Rising inflation rate has dashed hopes of any relaxation in the monetary policy. Market expects Reserve Bank of India (RBI) to raise the rates further in its next monetary policy review two months from now.

On 29 July 2008, the Reserve Bank of India (RBI), at its quarterly policy review, raised repo rate by 50 basis points to a seven-year high of 9% to curb inflation and dampen inflationary expectations. RBI also raised the cash reserve ratio (CRR), the proportion of funds that banks must keep on deposit with it, by 25 basis points to 9%.

Market will closely watch developments on the Indo-US nuclear deal. A two-day meeting of the 45 countries of the Nuclear Suppliers Group (NSG) began in Vienna on Thursday, 21 August 2008. A green signal by the NSG is required for the deal to proceed to the US Congress for final ratification. As per reports, nuclear supplier nations at a meeting on Thursday, 21 August 2008, proposed conditions for lifting a global ban on fuel and technology exports to India, a step required to implement a US-India nuclear cooperation deal.

A further rise in crude oil prices may act as a dampener for the stock markets. Light, sweet crude for September 2008 delivery surged $5.62 to $121.18 a barrel on Thursday, 21 August 2008 on the New York Mercantile Exchange (NYMEX) on weaker dollar and worries about tightening output from OPEC countries.

Foreign institutional investors (FIIs) sold shares worth Rs 831.40 crore in August 2008 (till 20 August 2008). FIIs sold shares worth Rs 28,133.40 crore in the calendar year 2008. Mutual funds sold shares worth Rs 886 crore in August 2008 (till 20 August 2008).