Weekly Stock Market Forecast - 4th Aug - 8th Aug

Last week, the Reserve Bank of India (RBI) took everyone by surprise by a 50 basis points (bps) and 25 bps hike in the repo rate and the cash reserve ratio (CRR) respectively taking each to 9% and it left the reverse repo and bank rates unchanged. Thus, even when the terror strikes (serial bomb blasts) failed to have any major impact on market sentiments, the markets reacted in a knee jerk manner to the monetary policy announcement.

However, crude prices which hit its three month low during the week to USD 120.42 a barrel and short covering ahead of the July derivatives segment expiry helped the markets to recover most of its losses even as volatility continued to remain at its peak. Notably, the higher than expected inflation (@ 11.98 %) numbers announced on Thursday too did not cause any major damage as its impact seemed already discounted. The sentiment was further boosted on the last trading day with the first visible sign of a pro-liberalization announcement by the new UPA formation, namely the 3G spectrum.

International market too witnessed huge volatility against the backdrop of battered U.S. economy which grew at a 1.9% annual rate for the second quarter of 2008. Furthermore, the rise in the initial jobless claims to its highest level in last four years too weighed heavily on the international bourses. Resultantly, the US market ended the week on a negative note.

Back home, the Central Bank has now scaled back its expectations of economic growth to 8% from 8.5%. However, it still remains on the higher side considering the slew of headwinds both, domestic as well as international. Further, the tone of the monetary policy remains hawkish as the RBI wants to bring down inflation to 7% before the fiscal end, now notably higher than its earlier medium-term target of 5%.

Though it is clear that the measures taken have been influenced by spiraling inflation, it may have little impact on prices as that is mostly linked to international factors (higher commodity and crude oil prices).

Thus, the Central bank using monetary tools to solve a supply-side problem may have minimal impact on inflation but could adversely impact growth, as spiraling cost pressures coupled with increased cost of funds would lead to further slowdown in the earnings growth of the Indian Inc.

Overall then , the market reflects several concerns and with the Q1 June 2008 earnings season almost over, major near term trigger for the domestic bourses could come from the announcement on the reforms side. Though major pro-liberalization announcement by the new UPA formation remains unlikely as the primary focus would still be taming the inflation beast ahead of key state polls and parliamentary elections due in May 2009, any pronouncement on the reforms side could trigger a rally at the relatively oversold Indian bourses. A good monsoon and a steep fall in crude oil prices coupled with positive global cues could further boost investor confidence in the near term.
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