The lack of new sops in the interim budget led to a sell-off in the stock market on Monday.
The impact of the much higher than anticipated borrowing programme for the fiscal year to March 2010 led not only to a rise in bond yields but also to a fall in interest rate-sensitive stocks.
Both the bank and realty indices of the Bombay Stock Exchange fell 4.58% on Monday, underperforming the market. These stocks are likely to continue to be under pressure, as maintaining low interest rates will be a challenge for the Reserve Bank of India, with government borrowing going through the roof.
With the interim budget behind it, the market is now likely to go back to searching for cues from global events, at least till the general election. There have been some signs of a reawakening of risk appetite on the back of strong bank lending in China, a rise in iron ore prices, a resumption of fund flows to Asia and a rise in bond yields in the US, indicating some of the money that fled to safe havens may be looking for better returns. The MSCI Bric index, for instance, is up 6.68% (7.6% in dollar terms) this month till 13 February, while the world index is down 0.22%.
Fund tracker EPFR Global said: “The latest flow data contained some bullish signals. High-yield bond funds recorded inflows for the 11th straight week, US equity funds focused on growth again outperformed their value counterparts, money market funds posted a second consecutive week of outflows, all of the four major emerging markets equity fund groups absorbed fresh money and several fund groups snapped lengthy outflow streaks.”
Also See Bric’s Surge Ahead (Graphic)
It is this increase in liquidity, says Amitabh Chakraborty, president (equity), Religare Securities Ltd, that could drive Indian markets higher in the coming weeks, despite the disappointment with the interim budget. According to him, the anticipated fall in earnings is more or less backed in the price.
This was seen from the fact that, despite some bad fourth quarter results, the markets didn’t react negatively. A little good news could be used by the market to try and stage a rally.
Nevertheless, Chakraborty says these rallies can only be temporary and the proximity of the election is likely to increase uncertainty and could even lead to a retest of the October lows.
In any case, substantial money will be committed to the Indian market only once the uncertainty around the election clears, although it’s true that many fund houses are now marking India as “overweight”, given its relatively high economic growth prospects and cheap valuations.
Graphics by Ahmed Raza Khan / Mint
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