Eyes on interim budget; market hopes for sops

Eyes on interim budget; market hopes for sops
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First Published: Mon, Feb 16 2009. 03 20 AM IST

Updated: Mon, Feb 16 2009. 03 20 AM IST
Much along expected lines, bargain hunting by funds and traders fuelled a rally last week on the stock markets. The highlight was the resilience shown by Indian markets to the global trend.
The Dow Jones Industrial Average fell 430 points, or 5.21%, last week. Indian markets also outperformed Asian bourses. The basic parameters, such as ratio of rising and falling volumes, and the breadth of markets, remained impressive. Foreign funds have also stepped up their buying during February, and so far this month, they have remained net buyers despite selling in the last two days.
On fundamental counts, the Indian economy failed to score as the Index of Industrial Production unexpectedly fell 2% in December from a year earlier, the second drop in three months and sharply below November’s downwardly revised 1.7%. The forecast was for industrial output to rise by 1.3%. October’s 0.3% fall in industrial output was the first in 13 years, and December’s drop only reaffirmed the fact that the economy is in a downswing.
Hitting the brakes: A Honda plant in Uttar Pradesh. The Indian economy failed to score as the Index of Industrial Production unexpectedly fell 2% in December from a year earlier, the second drop in three months. Ramesh Pathania / Mint
Industrial data, coupled with last week’s disappointing numbers related to exports, only highlight the fact that the economy is worsening. India’s exports have contracted on an annual basis for three consecutive months since October while imports have also slowed because of the downturn in economic activity.
On the brighter side, India’s annual inflation fell to 4.39% at the end of January, its lowest in just over a year, close to expectations of a sizeable drop from the previous week’s 5.07%, as a fuel price cut took effect. The inflation rate has tumbled from a peak near 13% last August, and is expected to fall further in coming weeks.
This reinforces the case for a further cut in interest rates by the Reserve Bank of India (RBI). RBI has been very aggressive so far and has cut its main short-term lending rate by 350 basis points to 5.5% since mid-October, and has also slashed banks’ cash reserve ratio—the percentage of deposits they have to hold in reserve with the central bank—by 400 basis points to 5%, to boost liquidity. One basis point is one-hundredth of a percentage point.
Globally, the trend remained uncertain and the undertone bearish despite sporadic buying. It is widely believed that the US economic stimulus package will not be sufficient to arrest the downturn in the US economy, making the prospect of a swift revival doubtful.
Back home, all eyes would be on the interim budget on Monday as the market is hoping for a lot of sops to revive a sagging economy. However, because expectations from the budget have risen considerably in the last few days, even a moderately generous budget could actually set a bearish undertone for the bourses. On the contrary, if the budgetary proposals beat or match market expectations, it could start the next leg of the stock market rally.
In terms of the Bombay Stock Exchange’s benchmark index, on its way up the Sensex is now likely to test its first resistance at 9,718 points. This has now become a moderate resistance level and may go easily in case rising prices are supported by rising volumes. Following this level, the next resistance is likely to come up at 9,929 points, which will also be a moderate level. However, the next resistance at 10,186 would be an important level and would offer a rising Sensex strong resistance. If the Sensex closes above this level, then the next resistance would come at 10,454 points.
However, going by the study of technical indicators, it is expected that the Sensex would face profit selling at 10,186 points and if it stabilizes around this level, then selling could intensify.
On its way down, the Sensex is likely to test its first support at 9,441 points. This is a crucial support level and investors should watch this carefully as a close below this level would be bearish and could signal more declines. Following this level, there would be minor support at 9,311 points.
However, if the selling momentum is high, then this level might not offer any ground to a falling Sensex. At 9,023 points, the short-term trend for the Sensex would be set.
For the S&P CNX Nifty, there is a strong resistance at 2,981 points going northwards. This is a moderate but important resistance level. If this level goes, then the next resistance would come up at 3,068 points, which would again be an important resistance level. This level might trigger some profit selling.
However, if the Nifty closes convincingly above this level, this would mean further gains, which might take it to the next resistance level of 3,140 points. This would be a trend-deciding level and if the Nifty is able to close convincingly above this level with good volumes, this could start the next leg of the stock market rally.
On its way down, the Nifty would test its first support at 2,874 points. This would be an important support level and a close below this level would be seen as very bearish. The next support level would then come at 2,820 points followed by the next support level at 2,754 points. A close below this level would be extremely bearish.
Among individual stocks, this week ICICI Bank Ltd, Housing Development Finance Corp. Ltd, or HDFC, and Housing Development and Infrastructure Ltd, or HDIL, look good on the charts. ICICI Bank at its last close of Rs434.40, has a target of Rs447 and a stop-loss of Rs419. HDFC at its last close of Rs1,540 has a target of Rs1,580 and a stop-loss of Rs1,487. HDIL at its last close of Rs87.75 has a target of Rs93 and a stop-loss of Rs81.
From my previous recommendations, Tata Steel Ltd touched a high of Rs203.85, which was well above its target of Rs196. Century Textiles and Industries Ltd hit a high of Rs186, which was well above its target of Rs173. Punjab National Bank hit a high of Rs417.95 and met its target of Rs414 easily.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Mon, Feb 16 2009. 03 20 AM IST