Global stocks, foreign fund flows to dictate trend

Key benchmark indices are likely to see a consolidation in the forthcoming week in absence of any major near term trigger. Profit booking may emerge after the recent rally on the bourses, which propelled the key benchmark indices to a 15-months high. Besides movements in global markets, foreign funds activity and progress of India's monsoon may continue to influence sentiment on the domestic bourses.

Indices have been on a roll recently following the revival in India's monsoon and firm global stocks. The BSE 30-share Sensex gained 3.67% in the week ended Friday, 11 September 2009 to 15,689.12, its highest closing since 30 May 2008. The S&P CNX Nifty rose 3.18% to 4829.55, its highest closing since 30 May 2008.

Meanwhile, the revival in monsoon has lifted sentiment. Rainfall was 21% above average in the week to 9 September 2009 continuing the upturn since mid-August, the India Meteorological Department said on 10 September 2009. The deficit for the June- September season narrowed to 20% from 23% a week earlier, the weather bureau said.

More than two-thirds of the people live in villages and 60 % of the farm land depends on the annual rains. Higher rainfall in the past week has helped India's 81 biggest reservoirs fill up much faster than normal for this time of year. Reservoirs are important for hydropower, which accounts for a quarter of India's generation capacity. They also provide water to irrigate winter crops.

Markets have risen sharply this year on increased global risk appetite triggered by hopes of a recovery in the global economy after a setback from a financial sector crisis. The Sensex is up 6616.99 points or 68.58% in calendar year 2009 as on 11 September 2009. From a 3-year closing low of 8,160.40 on 9 March 2009, the Sensex is up 8103.90 points or 99.30% as on 11 September 2009.

Foreign funds have been the key drivers of the recent rally. Their inflow in August 2009 totaled Rs 2,172.10 crore (till 10 September 2009). Their inflow in calendar year 2009 totaled Rs 42,370.60 crore.

Industrial growth rose for a seventh straight month in July 2009 over the previous year on higher government spending and lower borrowing costs, government data showed on 11 September 2009. However growth rose at a slower pace in July as compared with the previous month, indicating a slowdown.

India's index of industrial production (IIP) rose 6.8% in July 2009 from a year earlier, slower than the revised June's increase to 8.2%. India's economy had risen at a 6.9% pace in July 2008.

With economy getting back on track, the government expects GDP growth to accelerate to over 8% in 2010-11 boosted by the stimulus packages. The finance minister expects economy to expand more than 6% in the current fiscal despite scanty monsoon. This has given rise to fears of monetary tightening.

The Reserve Bank of India (RBI) had on 28 July 2009 left the reverse-repo rate unchanged at 3.25% and kept the repo rate at 4.75%. Earlier, the central bank had cut interest rates six times from October 2008 to April 2009 to boost the sagging economy. Industrial growth had dipped to 6.7% in 2008-09 after over 9% growth in the previous three years with the global economic meltdown casting its shadow on the economy

The wholesale price index (WPI) fell 0.12% in the year through 29 August 2009, lower than an annual decline of 0.21% in the previous week, data released by the government showed on 10 September 2009.

Economists expect inflation to rise to 5 to 6% by the end of the fiscal year March 2010 on the back of rise in commodity prices and revival in demand, above the central bank's projection of 5%.

India's finance minister Pranab Mukherjee on 7 September 2009 said that a growth is likely in the second and third quarter of the current fiscal due to fall in agricultural growth. He was a little doubtful of the 6.1% expansion achieved during the first quarter of this fiscal. The economy will not grow at the pace it did in April-June period, but that does not warrant a downward revision of growth forecast.

Global markets have been on a buoyant note with the US markets hitting fresh 2009 highs in intra-day trade on 10 September 2009 after the US Federal Reserve's latest survey of businesses in US found economic activity stabilizing or improving in most regions.

Emerging stocks hit fresh one-year highs on 11 September 2009 with buoyant Chinese economic data adding to optimism generated by G20 governments' pledges to keep monetary policy accommodative.