Bulls may prevail on strong FII inflow

Raging bulls may keep equity market firm next week amid strengthening signals of an economic recovery and expectations that a stable government will push economic reforms forcefully in its second term.

The bulls are back in business since March 2009, with soaring foreign inflows and after the ruling Congress party coalition thumped its rivals in mid-May 2009 and won a second term in office, raising expectations the big election win will pave the way to speedier reforms to boost the economy.

Foreign fund buying have bought Indian stocks worth Rs Rs 26903.10 crore in 2009 (till 11 June 2009). As Indian stocks continue to rally following last month's election result, market watchers are now shifting focus to the next likely catalyst, the government's union budget.

Finance Minister Pranab Mukherjee will present the union budget in the first week of July 2009, with focus on the common man while providing special attention to sectors hit hard by global crisis. Railway Budget for the year 2009-10 would be presented on 1 July 2009, followed by Economic Survey on 2 July 2009.

The budget will be a key indicator to see whether the stock market's recent gains are justified or whether an unrealistic pace for reform has been priced in. The deteriorating fiscal situation poses a serious threat to India's sovereign debt rating.

Surging fiscal deficit, which went up to 6.2% of GDP (gross domestic product) in 2008-09, is causing many to wonder how much more positive momentum the Indian equities market still has.

However, Suresh Tendulkar, the chairman of Prime Minister's economic advisory council, on Thursday, 11 June 2009, said India's fiscal deficit target for 2009/10 could be met with funds raised from the sale of third-generation (3G) wireless spectrum and stake sale in state-run firms. He also said he expected economic growth at about 7% in the year to March 2010.

First installment of advance tax is due on 15 June 2009. This will be a major trigger for the market next week as Indian companies are reportedly expected to pay an estimated Rs 40,000 crore as advance tax.

Despite shares becoming pricey after the rally, the rising inflow indicates that investors are betting on a big turnaround in corporate earnings growth in coming years.

The Purchasing Managers' Index (PMI) expanded for the second consecutive month in May 2009, as manufacturers reported higher new orders because of revival in domestic demand. But exports continued to remain a concern.

The index, which gets responses from purchasing managers in 500 industrial companies, increased to 55.1 in May, compared with 53.3 in the preceding month. A reading above 50 indicates expansion of that particular variable, while a reading below 50 indicates an overall decrease.

India's industrial production for April 2009 bounced back into the positive zone after declining three times in four months. The index of industrial production (IIP) rose 1.4% in April from a revised 0.75% decline in March 2009