Market may remain volatile

Volatility has been the order of the day on the bourses over the past few days and it may remain so over the next two months or so as foreign institutional investors (FIIs) resort to year-end profit taking. On Wednesday, 4 November 2009, the National Stock Exchange's volatility index - India VIX which measures the market's expectation of volatility over the near term, jumped a massive 22.35%. India VIX is a volatility index based on S&P CNX Nifty index option prices.

Most institutional investors based out of US and the Europe follow calendar year as their accounting year. Profit taking by funds triggered correction in most global stocks recently. Closer home, the Sensex plunged 1,921.07 points or 11.08% to 15,404.94 on 3 November 2009 from a 17-month closing high of 17,326.01 on 17 October 2009. The market staged a comeback in the next three days with the Sensex jumping nearly 5%.

The key economic data due next week is industrial production data for September 2009 on Thursday, 12 November 2009. On the same day, the government will release for the first time headline inflation data on a monthly basis.

Moderation in core sector growth in September 2009 after signs of pick-up in industrial growth in the last few months seems to have again raised some concerns. The index of core sector industries which has a weightage of 26.7% in the index of industrial production (IIP) clocked 4% growth in September 2009, sharply lower than the 7.8% in the month before. Industrial production jumped a robust 10.4% in August 2009.

Meanwhile, the Commerce and Industry Ministry on Thursday, 5 November 2009, said it would henceforth release the wholesale price index (WPI) on monthly basis from 12 November 2009. On that day, the government will unveil WPI for October 2009. As per the new data collation system introduced by the government on 5 November 2009, the weekly WPI numbers cover only primary articles, including mainly food items, and commodities in the broad group ‘fuel, power, light and lubricants.'

The new mechanism of segregating food inflation is expected to capture the price situation in a more realistic manner and narrow the wide variation, hitherto, between the WPI and the Consumer Price Index numbers. The consumer price index (CPI), which has a heavy weight of food items, rose an annual 11.64% in September 2009, lower than previous month's level.

Finance Minister Pranab Mukherjee said last week the government will maintain its fiscal stimulus due to uncertainty arising from the poor monsoon and the global outlook. The finance minister also said there are no immediate plans to place curbs on capital inflows. His comments send equities surging on Wednesday, 4 November 2009. The finance minister's comments have put to rest speculation of government clamping capital controls after a deluge of foreign portfolio inflows this year. Brazil, another emerging economy, last month, slapped a 2% tax on foreign investments into equities and fixed income instruments.

With short-term interest rates very low, global traders have turned to borrowing funds cheaply in the US and then reinvesting the proceeds in equities and commodities, looking to lock in higher returns and benefiting from further erosion in the dollar. These so called US dollar carry trades have kept putting pressure on the dollar as investors short the currency to invest elsewhere.

The US Federal Reserve on Wednesday, 4 November 2009, promised again to keep interest rates exceptionally low for an extended period because it expects only a weak recovery. There has been a solid surge in inflows in emerging markets equity funds this year