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2008-07-01

Investors should track market forces, say analysts

investor


Last week was bad for the markets. Both the Nifty and Sensex lost more than five percent. The market breadth remained negative as the number of declining stocks was more than the number of advancing stocks in the market. Foreign institutional investors (FIIs) have been net sellers in the market. They have taken out more than $500 million from the markets.


Some value buying activity was seen by domestic funds but that was nowhere close to the selling by FIIs. The market sentiments were already quite negative and the unexpected hike in the repo rate by the Reserve Bank of India (RBI) surprised most analysts.


These are some of the major factors investors need to watch:


Heavy FII selling


FIIs are selling heavily in the domestic markets this year. We have already seen FIIs taking out six billion dollars from the markets. Last year, FIIs invested 18 billion dollars in the domestic markets. One major reason for FIIs selling is the urgent need for liquidity in their parent companies abroad. Also, the macroeconomic situation in India has changed quite a bit this year. FIIs will be hesitant to invest fresh money till they see improvement in the macroeconomic environment and global inflation rate.


Sharp rise in crude oil prices


Rising crude oil prices is one of the major sentiment-dampeners in the domestic stock markets. India imports more than 75 percent of its crude oil needs from the oil producing nations. In the last few months, the crude oil prices rose sharply and touched an all-time high mark of USD 140 per barrel last week. Since this sharp rise cannot be passed quickly to the consumers it is resulting in a surge of oil pool deficit.
High commodity prices


This is another large problem faced by emerging economies. The prices of some basic commodities have gone up quite significantly over the last few months. Hence the high inflation rate almost all over the world. Analysts believe that this high inflation rate will hamper the world economic growth rate.


The RBI increased both the repo rate as well as the cash reserve ratio (CRR) this week to get a control on the rising inflation rate. The repo rate was increased by 50 basis points (0.5 percent) to 8.5 percent with immediate effect while the CRR will be increased in two phases. A 25 basis point CRR hike will be effective from July 5th and another 25 basis points will be increased from July 25th.


Many analysts and market traders expected a hike in the CRR after the double digit inflation numbers were announced on June 20. However, a sharp increase in the repo rate came as a surprise to many. This hike in repo rate will result in a rise in banks’ lending rates, which in turn will have an adverse impact on the credit growth and capital expenditure. This will lead to a slowdown in growth. The RBI also signaled that the tightening of monetary policy may not stop here and it may take further steps if required.


Many analysts believe that the current RBI action had already been factored in by the market. The markets had fallen to the lowest levels of this year. Investors should keep a careful watch on the weekly inflation numbers. The RBI may take some tough monetary policy measures again (CRR or repo rate hike) if the inflation does not show signs of softening. This will further add to the negative sentiments in the markets. Many analysts feel that the market sentiments are quite weak, and unlike in the past, it may take considerably longer for things to improve

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Disclaimer

Ours is an advisory role. The final decision and consequences based on our Information is solely yours. Moreover, in keeping with regulatory guidelines, we do not guarantee any returns on investments. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice.