Weekly Markets Fore cast - 18 Aug.

For the week gone by, even though the equity markets reacted positively to falling crude prices and positive global cues, the macro picture remained hazy on account of the consistently decelerating Index of Industrial Production (IIP).

For the month of June 2008, the growth in the IIP amounted to a mere 5.4%, which though higher than 4.1% (revised) growth in May 2008. This was well below the 8.9% recorded during the corresponding period in the previous year due to slowdown in the manufacturing sector which registered a growth of 5.9% as compared to 9.7% for the period under review.

Uncertainty was the order of the day during the early part of the week as investors awaited the outcome of SEBI`s board meet on issuance of Participatory Notes (PNs), which eventually did not materialize and merely got deferred.

Moreover, crude prices which had dropped to three month lows (below USD 115 per barrel) also rallied sharply against the backdrop of supply concerns near the end of the week. However on Friday, as Indian markets remained closed on account of its 61st Independence day, crude prices fell again to end below USD 115 per barrel mark on account of renewed concerns of slowdown in the global economy, which could put further pressure on the already falling demand for crude oil and thereby its prices.

Resultantly, the benchmark indices lost almost all its gains made in the previous week as investors decided to book profits at higher levels and stay on the sidelines towards the end of the truncated week. Higher inflation numbers and the global markets ending on a mixed note may cast its shadow on the opening trades of the week ahead..

The deceleration in industrial production has come on the back of tight monetary measures initiated by the RBI in the recent past which resulted into higher interest rates along with a rise in input cost. All this is affecting the investment climate in the Indian economy and the same is reflected in the weak IIP numbers. Resultantly, the Prime Minister’s Economic Advisory Council (EAC) has now revised the growth rate at 7.7% for 2008-09.

Though the fiscal stimulus provided by the Government in the form of reduction in excise duties and tax burden may increase consumption demand and hence mitigate the adverse impact of moderating the investment climate to a certain extent, the overall apprehension of slowdown still remains. Further, the implementation of the Pay Commision Report with retrospective effect is unlikely to bring cheer to investors.

Moreover, market is likely to come under some pressure as inflation galloped to its 16 year high at 12.44% for the week ended August 2, 2008 as compared to 12.01% during the week earlier. This rise in inflation has stoked fresh concerns about further tightening of monetary policy over the next few months.

However, with the revival of monsoons and most negative factors being already discounted, the market appears to have formed a higher bottom and this could trigger value buying at falls. However, the undertone may remain weak against amid renewed concerns over rising inflation and slowing economic growth. Participants would thus do well to keep a close watch on the movement of crude prices as its potency cannot be underestimated.

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