Rally in dollar likely to have a negative impact on Indian bourses

Rally in dollar likely to have a negative impact on Indian bourses

Bourses continued their roller-coaster ride last week as selective bargain buying by funds and traders set off losses on account of global concerns. But from a macroeconomic point of view, the news from across the globe was very encouraging. Data emerging from the US, including housing, employment and retail sales, was all good. Moreover, encouraging earnings from big names such as Oracle Corp., Research In Motion Ltd and Fedex also strengthened sentiment.

In Europe though, the reports were mixed, with German business morale rising to its strongest level since 1991 in December, buoyed by an increasingly strong domestic sector that is helping the economy power ahead of weaker euro zone peers. The Ifo business climate index in Germany rose to 109.9, marking its highest level in the last 20 years.

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However, news from Ireland was in total contrast. Ratings agency Moody’s came out strongly against Europe’s efforts to resolve a debt crisis, slashing Ireland’s credit rating as EU leaders took no new action to prevent the market turmoil from spreading. Moody’s cut Ireland’s rating by a stunning five notches during a European Union summit meant to restore confidence in the euro zone by creating a permanent financial safety net from 2013 and vowing to do whatever it takes to protect the euro.

Ireland’s ratings are now just three notches above junk at Baa1 with a negative outlook. Chances are quite strong that these ratings may fall further if Dublin fails to stabilize its debt situation and manage its fiscal deficit properly.

News from India was good as in the periodic review of credit policy, the Reserve Bank of India (RBI) maintained status quo and did not alter rates. However, a petrol price hike dampened sentiment as it is likely to stoke inflation fears, which have come under control with a lot of monetary tightening. Since RBI was expected to halt its rate hike cycle in the medium term, fears of a spike in inflation spooked investors and dashed hopes of a halt in the rate-hike cycle. Moreover, news related to corruption allegations continued to weigh on market sentiments.

China, as always, was under the lens for monetary policy action. Sharply rising inflation has left the Chinese Central Bank with little option but to control it, and an interest rate hike looks imminent. Since such a hike could slow down China a bit, it is being seen as bad news for the world.

Going forward, my studies suggest that the week ahead is tough and, talking strictly from an Indian perspective, there will be a drop. Indian bourses have been struggling in the absence of fresh leads and are heavily dependent on foreign fund inflows. But as the dollar could rally this week, as represented by the dollar index; it is likely to have a negative impact on Indian bourses. A part of this rally was witnessed on Friday, when the dollar index shot up from 79.6 to 80.6 points. It has a potential to touch 81.9 this week, which is primarily making me feel nervous about the outlook of the Indian stock markets.

Thus, clearly my outlook for the week is weak, and I expect a fall. Speaking in technical terms, the Nifty on its way down would find first support at 5,856 points, which is likely to be a moderate support only. If this support goes, then the next important support would come at 5,791, which is a good support level. However, if the Nifty closes below this level, then the down trend would gather momentum and the Nifty would find support at 5,703, which is likely to be rock solid.

On its way up, the Nifty is likely to test its first resistance at 5,979, which is a moderate resistance. If the Nifty crosses this level with convincing volumes, then it will make way for the next important resistance, which is placed at 6,027. This is an important resistance level and if the Nifty closes above this level with good volumes, then the outlook of the Nifty would change to positive. It is important to note that for a change in sentiment, the Nifty should close convincingly above this level.

Among individual stocks, this week Aban Offshore Ltd, Bharat Heavy Electricals Ltd (Bhel) and Shree Renuka Sugars Ltd look good on the charts. Aban Offshore, at its last close of 708.75, has a target of 729 and a stop-loss of 684. Bhel, at its last close of 2308.90, has a target of 2,352 and a stop-loss of 2,263, while Shree Renuka Sugars, at its last close of 89.70, has a target of 94 and a stop-loss of 84.

Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at ticker@livemint.com