Ample global liquidity may support stocks liquidity

Indian stocks remain in a sweet spot due a combination of ample global liquidity and an ongoing recovery in the economy. Foreign institutional investors have made massive purchases of Indian equities this year.

A deluge of global liquidity has boosted stocks across the globe this year. Governments and central banks around the world have injected trillions of dollars in the past one year or so to pull the world out of a most severe recession since the 1930s Great Depression.

However, a strong rebound in dollar, if any, may spook emerging market equities. The dollar index which measures the US currency against a trade-weighted basket of six major rival currencies has lost 8% this year, with near zero dollar rates driving the quest for high-yield assets outside the United States. The so-called dollar carry trade has put the dollar in a vulnerable position.

Lingering uncertainty on the huge US financing needs, some international debate on the status of the dollar and US Federal Reserve's intention to run an expansionary monetary policy for a prolonged period of time, offer additional ammunition for carry traders to use the dollar rather than other currencies.

Improving investor sentiment towards risk is still considered a good reason to sell the US dollar. But the dollar may bounce back once there are indication that the Fed will start reversing its extremely stimulating monetary policy.

The key data due on Friday, 4 December 2009, is US non-farm payrolls for November 2009. Economists expect the jobless rate to remain at a 26-year high of 10.2% in November 2009, with 100,000 non-farm payrolls lost. It would be the fewest jobs lost since January 2008.

Closer home, the government will unveil data on industrial production for October 2009 on Friday, 11 December 2009. The latest data showed that six core sector industries grew 3.5% in October 2009 from a year earlier, slower than upwardly revised annual growth of 4.1% in September 2009. The infrastructure sector accounts for 26.7% of industrial output. Industrial production jumped 9.1% in September 2009 from a year earlier.

Strong economic data and rising food price inflation has reinforced market expectations of a hike in cash reserve ratio (CRR) by the central bank to suck out excess liquidity in the banking system. CRR is the portion of deposits that banks are required to keep with the Reserve Bank of India (RBI).

The latest data showed the gross domestic product (GDP) grew by 7.9% in Q2 September 2009, from 7.1% in the previous year, shattering forecasts as stimulus measures boosted demand and manufacturing activity surged. The economy had registered a 6.1% growth in the first quarter.

The bulk of the recovery was led by a 9.2% growth in manufacturing, while mining and construction activities also expanded by 9.5% and 6.5%, respectively. But agriculture continued to me a major drag with a mere 0.9% growth.

Meanwhile, the initial public offer (IPO) of JSW Energy opens for bidding on Monday, 7 December 2009. Two days later, the IPO of Godrej Properties opens for bidding.