Weekly Newsletter - Feb 14 2010

Though the main Indian indices managed moderate gains after a rollercoaster week, the near-term outlook remains cloudy on account of an uncertain external climate. On the domestic front, IIP growth in December has been extremely strong notwithstanding the low base effect. A major worry now is with regard to inflation and its fallout on the monetary policy. The latest monthly inflation figures will be released on Monday and could have sentiment effect on markets.

A weak monsoon has led to a 7.5% drop in kharif foodgrain output. The good news is that the winter farm output is not likely to be quite as bad. What is needed is a good monsoon this year. If that doesn't materialise then there could be some hiccups for the economy and policy makers. The RBI has vowed not to tinker with rates till its annual review in April, but a sharper than anticipated jump in inflation could force its hands.

We expect the market to remain volatile and rangebound between a broad range of 4700 and 5200. There is considerable anxiety over how Europe's debt woes will play out. Also, China has surprised global markets with its second monetary tightening move in a month. One also has to see how the US economy performs over the next few months and how long does the Fed continue the ultra loose monetary regime.

Back home, the big event in the near term will be the Union Budget. The Finance Minister should announce a gradual rollback of fiscal stimulus as India Inc. no longer requires the support extended at the height of the financial crisis. At the same time, it may come out with a medium term road map for returning to the path of fiscal consolidation. The FM may or may not meet these expectations, in which case the market might falter again. Also, FII inflows must turn positive again.