The Nifty ended Monday at the year’s lowest close, but technical analysts may take heart from the fact that the index made a strong recovery in the second half of the trading session, rising nearly 2% from its intra-day low of 4,411.60 points.
The recovery was helped by the covering up of short positions and the fact that crude prices eased a bit in the afternoon. The index closed at 4,500.95 points, marginally lower than the earlier closing low of 4,503.10 on 17 March, but higher than the intra-day low of 4,448.50 points reached on 22 January this year.
About 80% of all shares traded on the Bombay Stock Exchange (BSE) declined on Monday, showing that market sentiment is currently very weak. About one-fifth of the BSE-500 shares hit new 52-week lows and more than half of these are trading below the levels on 17 March.
Thankfully for the markets, the open interest position in the derivatives market continues to be low, after being cut drastically by traders in January. Most new positions are built-up in Nifty contracts, and punters have by and large shied away from speculating in the stock futures segment. In January, high outstanding positions had only accentuated the fall—from that perspective, the restrictively low open interest bodes well for the market.
But despite that fact, further losses cannot be ruled out if crude prices continue on their northward journey. For a country that imports most of its oil requirements, rising prices are eating into the economy’s growth and have led to an escalation in costs across industries.
What has made matters worse is that the government has put curbs on pricing on industries such as steel and cement, leading to a further downgrade in earnings estimates.
The high inflation has raised the possibility of higher interest rates, which is why shares of banks and real estate players have been among the most hit.
The central banks of Indonesia and the Philippines have recently raised interest rates. Given the deteriorating macro picture, the markets may bump along around current levels for months.
Interestingly, the Indian market continued to underperform Asian indices on Monday, even though most of them face the same combination of high inflation and slowing growth. The underperformance is an indication that investors continue to be worried about the country’s high current account deficit and consequent downward pressure on the rupee.
On the flip side though, it reduces the Indian market’s premium to the region, making it more attractive.
Bank credit growth higher than last year
Bank credit growth is usually negative during the first few months of the fiscal year (FY), because of several reasons: banks window-dress their accounts at the end of March by pumping up the level of deposits and advances; government departments spend a large part of their allocations for the year in March; and because April marks the onset of the traditional slack season for business.
This fiscal, however, bank credit has already entered positive territory, growing by Rs15,923 crore in the year to 23 May. In sharp contrast, credit showed a contraction of Rs47,469 crore over the same period last year.
That seems counter-intuitive, given that the economy is slowing and credit growth can, therefore, be expected to slacken. One reason why credit growth has been higher this fiscal is because the growth is being measured from 28 March, since 28 March was the last Friday of FY 2008 and RBI (Reserve Bank of India) data is available on every Friday—in 2007, the last Friday of FY 2007 was 30 March, which means that this year we’re counting two extra days.
But that’s not the whole reason because, as on 23 May 2008, banks’ credit-deposit ratio was 73.08, compared with 72.32 on 25 May last year. Very probably, the growth in bank credit is due to higher credit offtake by the oil companies. Some of the pressure on oil companies has been eased by allowing RBI to use its foreign exchange reserves to supply dollars to them, in exchange for oil bonds.
Despite the higher credit growth, liquidity continues to be abundant, seen from the fact that banks have been parking a large part of their funds in government securities. This fiscal, growth in SLR (statutory liquidity ratio) securities has been Rs47,442 crore till 23 May, against Rs22,883 crore over the same period last year.
Nevertheless, as the slack season ends and credit starts picking up, liquidity could be under pressure if oil prices continue to rise and oil companies borrow more to meet their funding requirements.
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