The writing on the wall was there for quite some time: But the bulls raged a fighting battle before succumbing to market realities. Both the front line indices suffered their worst losses in the past 12 months on 31st May 2013. The liquidity driven rally extended far beyond reasonable levels to 6230 on the Nifty. The jolt has come in the backdrop of dismal GDP numbers for India for fiscal 2012-13 and the noise by some Central banks on withdrawal of 'Easy money policy'. What to expect in the coming months for Indian equity markets?
Our markets would be driven by the following factors in the immediate future:
1. Global Liquidity: There are indications that global liquidity tightening would start soon as Central banks withdraw stimulus packages slowly. The Euro zone crisis will only deepen before a lasting solution is found for the revival of some member nations. Strengthening of US dollar would lead to a waning interest by FIIs in emerging markets like India.
2. India's Economic woes: India's GDP growth would continue to falter on the back of mismatch between supply and demand. The current account deficit (CAD) will continue to play a spoiler as exports stagnate despite Rupee hitting a low of 56.70/$ once again. A pick up in investment climate is still a far cry. Inflation scare continues to dodge the policy makers. Markets have tried to rally on the back of rate cut hopes, but no real rate cuts have happened despite a cut in Repo rate by RBI. This would make the bulls withdraw from the markets. The last quarter results of companies also paint a grim picture for the immediate future.
3. Fluid Political scenario: A lame-duck Govt. continues to survive amidst serious policy paralysis, as the opposition remains confused. The chances of any serious business being conducted in the monsoon session of parliament seem remote. If stars are to be believed there is a strong indication of announcement of mid-term polls before or after the monsoon session of parliament. If that happens we could witness Lok Sabha elections between 20th Nov-20th Dec. 2013, and the formation of a new Govt. By the end of December 2013.
All the above factors may lead to a serious erosion in equity indices over the next few months. The front line Nifty index could again go back to the levels of around 5500 soon. It could even test the level of 5000 in a short span if elections are announced in India or Ben Bernanke decides to withdraw the stimulus package.
