Global risk appetite to dictate trend; derivatives expiry may cause volatility

Inflow from foreign funds will continue to dictate the trend on the domestic bourses next week as traders roll over positions in the derivatives segment from June 2010 series to the July 2010 series ahead of the expiry of the near-month June 2010 contracts on Thursday, 24 June 2010. The key global event next week is a meeting of the US Federal Reserve on interest rates.




Easing of euro zone debt worries boosted world stocks over the past few days, with Indian stocks scaling 1-½ month highs. Foreign funds stepped up inflows into emerging market stocks. Foreign funds bought Indian equities worth a net Rs 3250.05 crore in six trading sessions from 10 June 2010 to 17 June 2010, as per data from the stock exchanges. The net inflow totaled Rs 2161.35 crore in June 2010 so far (till 17 June 2010) compared to a massive outflow of Rs 12071.13 crore in May 2010.

Emerging-market equity funds received the second-largest net inflows this year in the week to 16 June 2010, according to the latest data from global fund tracker EPFR Global. Emerging equities funds got $2.5 billion, while emerging bond funds received $659 million in the week ended 16 June 2010.

Global risk appetite holds key with regard with inflow of foreign funds into emerging market equities. An increase in risk appetite normally triggers inflows whereas risk aversion triggers outflows. Euro zone debt worries have receded after a successful Spanish government bond auction on Thursday, 17 June 2010.

Meanwhile, the US Federal Reserve is seen reiterating its commitment to keep interest rates exceptionally low for an extended period at the end of a two-day policy meet on 22-23 June 2010.

Closer home, the progress of the monsoon will be keenly watched. Annual monsoon rains were 8% below normal in the week to 16 June 2010, the India Meteorological Department (IMD) said on 17 June 2010. The south west monsoon is important for India as about 60% of the country's farmlands are rain-fed and more than half of the workforce is employed in the agriculture sector. The south-west monsoon usually covers the entire country by mid-July. The weather office late April 2010 said rainfall is likely to be 98% of the long-term average. Good monsoon rains would help raise farm output, boost rural incomes and lower food inflation.

The market sentiment remains firm, with most Indian firms paying higher advance tax in Q1 June 2010 over Q1 June 2009. Higher advance tax payment normally indicates higher profits for the period under review. Advance tax payments by companies during the April-June quarter account for 15% of the total advance tax payable in the fiscal year.

Global rating agency Fitch recently raised India's local currency rating outlook to stable from negative as the rating agency forecast a decline in government debt to GDP ratio to 80% by March 2011 from 83% at the end of March 2010. It also upgraded India's growth forecast to 8.5% in the year to March 2011 from earlier forecast of 7% growth.