Wednesday, July 31, 2013

Economy in Doldrums: Markets in Dilemma!

The economic situation in India has turned from bad to worse over the past 6 months, and there are no clear signs when the economy shall bottom out. Core sector performance is slipping from quarter to quarter. Central bank's focus is on preventing the Rupee from falling further. But a weak currency is a mere symptom of the growing economic malaise. From a situation when we were hoping for aggressive rate cuts to happen, we are now staring at the possibility of hardening interest rates for the short term at least. Our markets have sustained within the range of 5500-6200 on the Nifty, hoping to break-out on the upside once interest rates start softening. But RBI governor has finally dashed these hopes, and in all probability the markets would appreciate the harsh reality and prepare for a break-out on the downside soon. 

Although broader markets have given negative returns in the past few months, the front line indices have held out because of index management by large investors. The markets have been able to maintain the range mainly because of a few sectors: Pharma, FMCG, IT and Oil & Gas to a large extent. But analysts are now fearing that valuations of most stocks from these sectors have become extremely stretched. This is the reason why the current down-trend has started. But, the bulls are not going to give up easily, and would try to lift the Nifty towards the 6000 mark once again, before surrendering to the bears.

The current economic scenario holds no hopes for the bulls, at-least till the conclusion of national elections, and installation of a new Govt at Delhi. Let us hope elections are declared soon, so that the looming uncertainty is removed. Going by the current mood in the political circles, the Monsoon session of parliament will be a non-starter, it may ultimately trigger the announcement of mid-term polls either before or after Independence day. It should pave the way for a Nov-Dec. poll as indicated by me earlier. The markets may initially give a lukewarm response to the announcements, but would react positively later because the announcement of elections may prove to be a 'blessing in disguise' to kick-start a faltering economy. Till then let us keep our fingers crossed.