March 2009 derivatives expiry to keep market volatile

The market may see volatility ahead of the expiry of March 2009 derivatives contracts. Local investors will continue to closely monitor movement in global equities. Foreign institutional investors' investment activity holds key. Derivative contracts for March 2009 series are set for expiry on Thursday, 26 March 2009.

Hopes of further rate cuts by the Reserve Bank of India (RBI) remain with the wholesale price inflation at record low. Inflation based on wholesale prices rose 0.44% in the week to 7 March 2009 from a year earlier after gaining 2.43% in the previous week, government data released on Thursday, 19 March 2009 showed.

Foreign securities firm Nomura expects another 100 basis points cut in both the repo and reverse repo rates from the Reserve Bank of India (RBI) by mid-2009. Governor Duvvuri Subbarao on 4 March 2009 cut the key repurchase rate or repo rate to an all-time low of 5%, having reduced the measure by 400 basis points since October 2008. On the same say a 50 basis points cut in reverse repo rate was also announced, with immediate effect. 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.

The International Monetary Fund (IMF) on Wednesday, 18 March 2009, said India should rely more on monetary policy to support the economy. IMF said the Indian economy is slowing fast and the outlook for the next year remains uncertain. The main upside risk was a larger-than-anticipated impact of the stimulus measures that the authorities have already implemented.

The IMF forecast India's gross domestic product growth would slow to 6.3% in the 2008-2009 fiscal year, and to 5.3% in 2010. Indian economy has grown at average rate of 9% in the previous four years.

The impact of economic slowdown was clearly visible in advance tax collections as 18 out of 50 big corporate tax payers contributed less to the Government kitty this fiscal compared to Q4 payments in the last fiscal. However, the Government collected 10.54% more from the Rs 16,252.48-crore advance tax paid by 50 big corporates in the fourth quarter this fiscal as against Rs 14,703.19 crore a year ago.

The activity of foreign institutional investors (FII) will be closely watched after they turned buyers to the tune of Rs 975.10 crore in four trading sessions from 13 March 2009 to 18 March 2009. They still remain net sellers in this month and year as their outflow totaled Rs 1301.10 crore in March 2009 and Rs 8,242.10 crore in calendar year 2009 (till 18 March 2009).

Investors are unlikely to build large positions in India due to political uncertainty 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.

Meanwhile, the US Federal Reserve in an aggressive move on Wednesday, 18 March 2009 said it would buy $300 billion in longer-dated Treasury over the next six months, along with another $850 billion in mortgage-related debt, to pump liquidity into near-frozen credit markets. On the same day, the Fed kept the benchmark federal funds rate-the interest charged by banks for overnight loans to one another, unchanged in the range of 0 to 0.25%.

Earlier, global stocks had risen after the US Federal Reserve chairman Ben Bernanke on 15 March 2009 said the US economy should start recovering from recession next year if there is the political will to complete the costly rescue of the shattered banking system.

Meanwhile, battered US banks showed signs of life after chiefs of Citigroup
, Bank of America and JPMorgan Chase made statements saying they have returned to black early this year and assured they should ride out the recession without more taxpayer help.