Inflation, Monsoon Remain a Concern

     Print Edition: August 2012

Sandesh KirkireThe Sensex and the Nifty rose by 12.77 per cent and 14.45 per cent in the first half of 2012, respectively. In the later part of the period, the market saw high volatility.

The market sentiment seemed to sag on account of low FII participation, apparent reforms lacuna, rising current account deficit and uncertainty surrounding the EU crisis.

However, hopes of recapitalisation of European banks in June helped allay financial contagion fears.

This, in turn, reduced the risk premium, leading to a worldwide relief rally. The reaction in India has been more pronounced on account of the expected change in the direction of reforms. Consequently, Sensex and Nifty have risen by 7.45 per cent and 7.20 per cent, respectively in June.

Another issue tormenting the markets has been the rupee fall. The rupee has lost more than 20 per cent in the last 12 months. Among other things, the uncertainty surrounding the GAAR regulations had spooked incremental FDI and FII investments.

The widening current account deficit only aggravated the balance of payment position. To compound that, the slackening domestic savings rate, stubborn inflation and high interest rates led to rapid moderation in the economy.

However, the general market belief is that the rupee may have bottomed out. The 20 per cent plus decline in crude oil prices since June 11 implies a currency saving of nearly $ 5-6 billion annually. This may help to reduce some pressure on the aggregate import bill.

To further support the rupee, the FII investment ceiling in gilts has been raised by $5 bn to $20 bn. The ECB limit too has been hiked from $20 bn to $30 bn. In these circumstances, the bond market is maintaining a stable to benign interest rate outlook.

Factors like fast moderating economy, OMO by RBI and increased FII investment support to the debt market are providing buoyancy. This, in turn, has led to marginal steepening of the yield curve. However, issues like high domestic inflation number, buoyant commodity costs in rupee terms and the monsoon outlook continue to remain a risk.

It will be the strength and interplay of these factors that will determine the market trend. RBI has consequently maintained a status quo in its latest monetary policy meeting, to allow for these factors to play through.

SANDESH KIRKIRE
CEO, Kotak Mutual Fund

(This is a sponsored article)

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