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Increasing inflation may dampen bull run

Increasing inflation may dampen bull run
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First Published: Mon, Feb 12 2007. 02 38 AM IST
Updated: Mon, Feb 12 2007. 02 38 AM IST
Delhi: Key indices scaled new peaks last week as bulls ruled the bourses on strong economic data. Steady global bourses and positive news flow added to the positive sentiments.
Upward revision of the GDP growth-rate forecast to 9.2 %, the fastest expansion in past 18 years, gave the market necessary momentum, which got accelerated further with the news of the government’s approval for initial public offers in three state-run power firms, marking a limited revival of a stalled asset sales programme.
Heavy buying by foreign funds in the last few days boosted sentiments further. Data released by Sebi shows foreign institutional investors bought $153.7 million (Rs676.28 crore) worth of Indian equities on Thursday, $120 million on Wednesday and $144.3 million on Tuesday, indicating that the rally on the bourses was on strong buying and there is still steam left in it.
However, the data related to inflation, released on Friday, was a dampener,as despite all efforts by the government, inflation rose to 6.58% in late January, its highest in more than two years, which led to partial sell-off on the bourses.
This week, expect the markets to stay cautious, though the outlook remains bullish for the month, which means there could be more profit-selling in the days to come. The mood on the global bourses is also sombre after the US markets fell on Friday. Though the fall on the US bourses was due to specific reasons such as rising oil prices and concerns raised by chip-maker Micron Technologies over weakening demand. This issue is unlikely to impact bourses here when they open Monday.
Rising crude prices should not be a big concern at this point of time, as domestic oil prices aren’t going to be hiked at present levels of international crude. Moreover, the weather forecasts about 10 more days of bitter cold in the US Northeastern and Midwestern states, which means the spurt in oil prices could be short-lived. But inflation will be a concern this week, with some more action expected from the government.
However, one needs to see the other side of the coin as well, which suggests there could be positive news for specific industries due to inflation. For example, the market would welcome news about a cut in excise duties to check soaring prices.
The banking sector seems to be the other likely gainer as the demand for credit is still high despite higher interest rates. In a nutshell, from the stock market’s point of view, all is not bad about inflation and, therefore, investors need not hit the panic button—at least not yet. What is worrisome at the moment is high open interest in the derivative segment, which is not easy to sustain. But as long as the money flows in and there is good liquidity, it will not be a burden.
Technically, the charts show weakness in the coming days, which means the Sensex could slip further on Monday despite a positive start. On its way down, the Sensex would test its first support at 14,450 points. This being a moderate support level, it can only withstand normal profit selling.
If the selling intensifies, then the Sensex would find its next logical support at 14,250 points, which should give a strong support. However, for any reason, if this support level is broken, then the next and deciding support will come at 14,018 points.
On the other hand, on its way up, the Sensex may come across resistance at 14,712 points, following which the next major resistance will be placed at 15,120 points.
In a nutshell, the markets look weak in the initial part of the week, but they are likely to find good support later in the week and to bounce back.
Long-term investors need not worry as long as the Sensex stays above 14,018 points, while short-term investors can track these levels to ascertain the trend.
Vipul Verma is a Delhi-based investment advisor. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Mon, Feb 12 2007. 02 38 AM IST
More Topics: Money Matters | Equities |