Market may extend losses on scanty rains

The market may extend losses registered in the first week of August 2009 on concerns about below normal rains and worries that the initial public offer of state-run NHPC will suck out liquidity from the secondary market. The market underwent a correction in the first week of August 2009 after a sparkling rally last month. The BSE Sensex lost 510.07 points or 3.26% in the week ended 7 August 2009.

The key economic data due next week is industrial production for June 2009. Industrial output had risen by a faster-than-expected 2.7% in May 2009. Among the global indicators, the US Labor Department is due to release its non-farm payroll report for July 2009 on Friday, 7 August 2009. If the jobs data is worse than expected, it may trigger a sell-off in global equity markets.

All eyes are now on how monsoon fares in August 2009 as a dismal rainfall could be bad news for the country's agriculture, economy and even its stock market. According to reports, the average rainfall in July 2009 was near normal but it had been below normal for northern states like Uttar Pradesh, Bihar, Punjab and Haryana.

The rainfall for the week-ended 5 August 2009 was reported to be 66% below normal at 23.5 millimeter (mm). Monsoon rains between 1 June 2009 to 4 August 2009 were 25% below normal.

The June-September rains are the main source of irrigation for farms and are crucial for Asia's third-largest economy as more than two-thirds of the people live in villages and 60% of the farm land depends on the annual rains.

As far as liquidity is concerned, the equity market is likely to be short of cash next week. The big bang IPO of NHPC, that closes on 12 August 2009, has already weakened equities by sucking investors' cash away from the secondary market.

The IPO of NHPC, state-run hydroelectric power generator, was fully subscribed within minutes of opening on Friday, 7 August 2009. This is the first IPO by a public sector company after the Congress-led United Progressive Alliance assumed office for a second term, this time with a decisive mandate. The NHPC IPO is a combination of fresh sale of shares by the company and a 5% divestment of stake by the government.

It is likely that in short term there will be diversion of funds from the secondary market to the new offerings. However, this factors will not diminish the prospects for shares in the secondary market in the long term. The market would rebound after consolidation, supported by an expected upward revision in earnings estimates for companies by brokerages after stronger-than-expected Q1 June 2009 results.

A leading US-based brokerage has raised India's equity market to 'overweight' from 'neutral' amid political stability and stepped-up economic reforms.