The Hindu Business Line : Dalal Street likely to witness high volatility

This week market may remain highly volatile and towards the end it may be ready for a brief pre-Budget rally. According to market experts, a more-than-usual volatility may be caused by several factors. The expiry of the June futures and option contracts in the derivatives segment is likely to be one obvious reason for extra swings. But the fact that the Nifty is going free-float from June 26 and the consequential changes in weights in the pivotal counters may cause quite an upheaval in the trading positions and strategy. The fundamentals have not been the driver for the market in the recent weeks. The liquidity and positive sentiment were fuelling the post-elections rally. But the strategy of using the sentiment card over and over again has its limitation. The liquidity flow seemed to have stabilised at a level, which suggests slowing of the 13-week momentum.

The market operators are likely to make another attempt to pump up sentiment and attract liquidity. But the results of that effort through price action may not be as encouraging as it was a few weeks ago.

Concerns over the economic uncertainty and the Governments ability to deliver early have taken over the investors’ psychology at current levels. Markets’ over-expectations from the Government and particularly form the divestment initiative and the banking system’s ability to bring in an easy money regime may not be fulfilled unconditionally. There is a growing realisation that a market bubble may not be supported by a large section of investors at this moment. The long-term investors, both local and overseas, are cautious even though risk aversion has come down from its peak in January.

Monsoon magic

Economists were surprised when India’s GDP growth in the first three months of 2009 was higher than expected, largely because of strong performance by the agriculture sector. While urban demand was depressed because of the global downturn, rural markets were showing signs of growth. Companies and economists took note of the trend. Strategies to provide services like banking and products shampoos to cars to gold jewellery were being reshaped by the rush to cater to rural demand.

But the rural economy is still dependant largely on the monsoon, which has been playing truant so far. If it is delayed unusually and its progress remains patchy, the agriculture and associated activities in the rural sector would undoubted affected. India had been lucky in the past three years in terms of rains – its spread and quantum. This year, when economy is in a difficult spot, insufficiency rains may have cascading effect on the overall activity and economic growth of the nation.

Decoupled dance

There had been assumptions that India along with three other BRIC markets would perform better this year than the rest of the world including other emerging markets.

In the current quarter till the middle of June, the global investment data provider, EPFR Global says, $6.5 billion of funds has flowed into China, $5.1 billion into Brazil and 1.9 billion into India. Only Russia trails on $1.4 billion in the four-nation group. This in itself, however, does not ensure a confirmed decoupling. Each of the four BRIC economies have their own problems to contend with – whether in the backyard or imported from the global arena.

(Responses may be sent to jayanta_mallick@thehindu.co.in)

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