The Hindu Business Line : Toss-up between inflation, pre-Budget hopes for investors

With the Government vigorous on curbing inflation, which has skyrocketed to 6.73 per cent on the back of surging food and vegetable prices, punters in the stock market are facing anxious moments.

The benchmarks, which saw smooth rally until now, suddenly switched gears last week to witness a period of volatility.

Confusing signals

In a move to check rising inflation, the RBI hiked cash reserve ratio for the second time in three months. This is estimated to remove about Rs 14,000 crore from the system.

However, inflation has not shown signs of abating despite the RBI move, rising further and forcing the Centre to do something more.

On its part, the Government reduced petrol and diesel prices, apart from banning exports of key commodities such as wheat and onion.

Even as the Government was combating inflation, the National Security Adviser, Mr M.K. Narayanan, dropped a bombshell at the 43rd Conference on Security Policy in Munich by stating that terrorist groups are manipulating the markets to raise funds for their operations.

The Left parties have already urged the Government to immediately ban Participatory Notes and phase out existing ones to curb their misuse.

However, the market took the news in its stride and rebounded strongly on Thursday, leaving retail investors a confused lot.

Inflation: Political angle

The Government is already under pressure not only from the opposition but also from its allies and supporting parties.

The CPI(M) has blamed the Government and said that the inflation graph is rising because of hike in prices of essential commodities. It has called upon the Centre to ban futures trading in foodgrains.

It may be recalled that Forward Markets Commission had imposed a temporary ban on futures trading in urad and tur in an effort to control their price rise in January-end.

With the allies voicing their opposition, trading circles fear that the Government might ban trading in some more key commodities.

Traders and analysts believe that the Government should take long-term measures to improve farm productivity rather than blame futures trading. They are of the opinion that any move in that direction would be retrograde; in fact, they are expecting further stock market and financial reforms.

Many broking houses handle both commodities and stock market operations and any drastic step on the commodities front could hit them.

The coming week is going to be a tough one for investors, as they have to toss up between inflation-related actions and pre-Budget hopes.

With the settlement of the February contracts in the futures and options (F&O) segment on the NSE, another volatile phase cannot be ruled out.

Signals from FIIs have also not been clear, as they have remained net sellers in the F&O segment even while remaining net buyers, albeit marginally, in the cash segment. Mutual funds, on the other hand, continue to remain in selling mode.

Oil marketing companies, which were under pressure following the cut in petro product prices, will come under more pressure as crude oil prices rule above $59 a barrel due to unrest in Nigeria.

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