Too Many Expectations?

Market has too many expectations from the forthcoming Budget ranging from tax cuts, tax holidays, special status for some industries, fresh government investment in infrastructure and divestment of public sector enterprises. Even though, electoral victory by the Congress is more attributed to its populist measures such as farm debt waiver, pay commission and NRGEP and Congress may not like a pro-corporate image ahead of elections in key states, many market participants still believe that Congress government will push for aggressive financial reforms in the coming budget.

However, I have my own doubts whether the budget will be able to fulfill all of the market expectations. With the fiscal deficit mounting to around Rs.4,00,000 crores and the first half yearly borrowings at Rs.2,54,000 crores, government’s ability to push through larger tax cuts is quite limited even though there may few reform measures here and there more expectedly in export oriented sectors.

Hence it will be very difficult for the budget to make a major positive impact on the market as many positive factors have already been discounted in the prices. At the same time, we can not underestimate the ability of certain market participants and media to derive great things from nothing make others to believe it.

In the short term, market is expected to track the global events. In fact, our recent rally is more attributed to the FII inflows which have been stupendous in the last three months. FII inflows were mainly attributed to their expectations of a ‘V’ shaped recovery in the global economy and the huge liquidity made available to the American banking system.

Last week, global market participants came to a new conclusion that even though the recession has come to a near-end as of now, the recovery may not be as swift as markets expected earlier. US economic data has been quite mixed in the recent times and the recent downgrading of American banks resulted in strengthening of US Dollar and JPY, the less risky currencies against other major global currencies including INR. World markets are now apprehensive of raising commodity prices and Federal Reserve’s probable monetary measures to tame the inflationary expectations. These speculations led to withdrawal of FII money from emerging markets including India. Such withdrawal coupled with some local negative sentiments rising from Bombay High Court’s judgment in RIL-RNRL case resulted in a big market fall last week.

I feel that delayed monsoon, revival of Indian industry and performance by the Indian Corporate and firm government action in continuing the financial reforms would carry more weight in the minds of FIIs, who may be waiting in the sidelines for some more time to get better clarity in the global scenario. Even though, negative inflation is bad news for the industry, as RBI Governor put it, India may not fall into a deflationary environment any time soon.

Traders are requested to exercise caution in the near term and initiate long position only in case of Nifty breaking 4400 levels firmly. Banking sector is expected to do well in the short run.

Investors may accumulate shares of fundamentally strong companies during fall. Banking stocks may perform well in the long run. Indraprashtha Gas may be considered as a long term investment option. Strong Government Companies’ stocks may also be considered.

Technically Sensex finds good support at around 14,500, 14200 and 13,600 levels. It faces strong resistance at around 14,700 and 15,200 levels.

Wishing you a happy week ahead