Weekly Review and Forecast.

>> Sunday, November 2, 2008

As market participants prepared themselves for the festival of lights, the global markets provided the much needed support for some cheer. Though the markets commenced the week on a negative note taking cues from the weak overhang of the prior week’s global markets, the Indian benchmark indices recorded a sharp recovery on the back of short covering of derivatives contracts ahead of its expiry.

Volatility remained at its peak even as the Sensex plunged to its three year low. Nevertheless, given the strong sentiment on the occasion of Muhurat day trading followed by the strong global markets, the Indian market recorded handsome gains as the BSE Sensex ended above the 9,000 points mark.

Market participants also took cues from SEBI’s move to relax creeping acquisition norms as it allowed promoters to raise their stake yearly to 75% via open market purchases without triggering an open offer instead of 55% earlier. Further, a sharp drop in the inflation rate to 10.68% from 11.07% provided additional comfort.

All this coupled with a 50bps cut in the key interest rate by the US Fed in an attempt to revive its ailing economy from one of the most severe financial crisis in recent times helped the Indian benchmark indices to close on a positive note after consecutive weeks of carnage.

Last week, the Indian Central Bank cut its forecast for growth in 2008-09 to 7.5%--8% from its earlier indication of 8% and followed a wait and watch strategy at its latest policy meet. In contrast, the US Fed cut its rate against the backdrop of looming recessionary pressure. However it painted a bleak picture of the economy, focusing on the lingering impact of the financial market crisis, lack of available credit and erosion in consumer and business spending. The Bank of Japan too cut rates for the first time in seven years, to 0.30% from 0.50% in its efforts to ease the ongoing financial crisis.

However in a sudden move over the weekend , the RBI cut the CRR and the Repo rate by yet another 100 bps and 50 bps respectively now signals softening of interest rates and would thus cap the decline in growth. The central bank also reduced the statutory liquidity ratio (SLR) by 100 bps to 24 per cent in its attempt to boost liquidity.

For now, though one cannot safely assume that the worst is over as the FIIs now seem to be using every upswing as an exit route, the RBI ’s sudden cut in policy rates has changed the entire outlook for the week ahead. Hence, barring unforeseen developments there is now every chance that a sharp pullback rally is in the offing.

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