FII activity, global equities hold key

Key benchmark indices may track movements in global equities and foreign institutional investor activity will be closely watched in a near term. Sings of recovery in the economy and expectations of further rate cuts by the central bank after recent sharp fall in inflation, may provide support to the markets.

A section of the market expects further rate cuts by the Reserve Bank of India. Foreign securities firm Nomura expects another 100 basis points cut in both the repo and reverse repo rates each from the Reserve Bank of India (RBI) by mid-2009. Inflation based on the wholesale price index (WPI) rose 2.43% in the year through 28 February 2009, much lower than previous week's 3.03% rise, data released by the government on, 12 March 2009, showed. It was the smallest annual rise in inflation since 8 June 2002 when inflation was at 2.18%. Its lowest ever was 1.13% on 2 February 2002.

The sharp fall in inflation over the past few months has provided room for the central bank to cut interest rates to protect the domestic economy from the negative impact of the global financial sector crisis and the recession in key global economies. The Reserve Bank of India (RBI) on 4 March 2009 cut the repo rate and reverse repo rate by 50 basis points each, with immediate effect. At that time, RBI said it will continue to maintain ample liquidity in the system. Repo rate is the rate at which RBI lends to commercial banks and reverse repo rate is the rate at which RBI accepts deposits from banks.

Meanwhile, there are signs that the stimulus packages announced by the government since December 2008 and an aggressive rate cuts announced by the central bank since October 2008 have started having some positive impact - lower interest rate have helped automobile sales rebound in the past few months. Interest rates have dropped drastically over the past few months.

A pick up the production of consumer goods and capital goods point to a rise in investment and consumption demand. Government data released during trading hours on Thursday, 12 March 2009, showed consumer durables output rose 2.5% in January 2009, moving into positive territory after three months of decline on the back of high growth in automobile sales. The capital goods sector saw strong growth, with output rising 15.4%, led by an impressive expansion in production of machinery and equipment. The pick up in production in these two segments also indicates that there is an improvement in the credit availability to the industry.

Further, a large government spending plan may help pump-prime the economy. The economy will also get another stimulus in the form of a huge spending by the political parties for the forthcoming Lok Sabha elections. As per reports, around Rs 6,000 crore would be pumped into the system as political parties and candidates splurge on their campaign and the Election Commission pays a huge bill for conducting the election. And the main beneficiary would be the services sector that often spurs growth.

Another plus point is that prospects look bright for the Rabi harvest in contrast to the previous kharif harvest which saw coarse grains recording lower output. Agriculture remains the mainstay of the economy and if rabi output increases as has been projected, rural demand may rise in the coming months, though perhaps not as much as had been hoped.

Meanwhile, the fourth tranche of advance tax payments of India Inc is due on 15 March 2009. Companies have to pay 25% of their annual tax bill in the March installment. Despite the economic slowdown, the income tax department expects advance tax collections to be marginally better than the collections in the third quarter. Corporate India had paid Rs 45400 crore as the third tranche of advance tax by 15 December 2008, much lower than the Rs 54900 crore companies shelled out in the third tranche a year before.

However, investor sentiment may remain edgy due to sustained selling by foreign funds. FII outflow in March 2009 totaled Rs 2276.20 crore (till 12 March 2009). FII outflow in calendar year 2009 totaled Rs 9217.20 crore (till 12 March 2009). Globally, investors are pulling out money from hedge funds, forcing hedge fund managers to dump assets.

Also due to political uncertainty, investors are unlikely to build large positions with general election to be held in mid-April 2008 to mid-May 2009. More so at a time when it is highly unlikely that either Congress or BJP comes to power on its own i.e. without the support of other smaller/regional parties.

The market may recover if a coalition led either by Congress or BJP comes to power. But the recovery will be subject to BJP or Congress led coalition coming to power without a support from the Left front which is against key economic reforms. The market will then look for whether the new government which comes to power undertakes second generation reforms that could bring India back on a strong growth path witnessed in five years between 2003 and 2008.