SENSEX has jumped 19% this year

SENSEX has jumped 19% this year (ignoring today's fall of more than 100 Nifty points) on enormous liquidity from EU & USA & has wiped more than 3/4^th of 25% losses it suffered in whole of 2011. The rupee, too, has strengthened this year, climbing around 7% against US$, after a drop of about 18% last year that added to the losses for U.S. investors in the Indian stock market. Liquidity is due to printing of billion of Euros & USD by respective Central Bank & offering it on low interest rates. A lot of this money has found its way into Equities in emerging markets such as India. FFI's have poured nearly $5 billion into Indian stocks this year as compared to a pullout of $357 million in 2011.

 

Our stocks are among the best-performing in calendar 2012 (after Egypt, Russia & Turkey), but whether this rally has legs could depend on 3 key events in March.

 

Following 3 events in March is of great importance for deciding the course of the market going forward.

 

1.      State elections,

2.      Release of the federal budget, and a

3.      Central-bank review of interest rates will offer signals on whether the government is likely to adopt policies desired by investors.

 

Many traders are dazed  by the speed and steepness of rally. Some now say the market has chewed more than it can digest. The economy and corporate sector performance has lagged & they have to play catch-up to justify the present exuberance in Sensex.

 

Here are few point of concern:

 

1.      Economic growth has slowed due to 13 interest-rate increases by the RBI to combat inflation. Growth is expected 6.9% for the year to March 2012, the slowest in 3 years.

2.      Stock market rally started with RBI's muted signal to ease monetary policy. Right now it seems unlikely due to advent of new CPI & inevitable rise in prices of Petroleum product during 1^st week of March.

3.      The lack of intention to push economic reforms, the lack of investments in infrastructure & the damping of business sentiment—haven't gone away just because of a turn of the calendar.

4.      No major Indian company has lately talked about investing in large business projects.  Govt. need to ensure that confidence back.

5.      Government needs to be more proactive while being fiscally prudent.

6.      With a coalition setup, can Govt. ensure no repeat of rolled back its decision to allow foreign multi brand retail stores, like Wal-Mart, Tesco to set up shop in India.

7.      117-year-old land-acquisition law, which has been a major stumbling block to infrastructure development. A new land-acquisition bill was introduced in Parliament last year that, among other things, would make it easier for companies to buy land for industrial uses, but no headway has been made.

8.      The government's promised overhaul of India's tax regime, aimed at streamlining and increasing collections, has also been stalled in recent years.

 

On March 6, results of elections in five Indian states, including India's most populous state, UP will be announced. Many market participants are hoping the Congress party, which leads the coalition hi, will be able to strengthen its showing in UP & other states. That could help strengthen the national government's position in New Delhi and help it to take the steps that investors want to see. A more stable, stronger, clear government at the center...sends a signal to FFI's that they can invest more in India.

 

Investors are also looking for signals from central budget, which will be announced March 16. Lets hope FM will take steps to rein in India's burgeoning fiscal deficit, by cutting back on subsidies and expenditures, and boosting revenues by overhauling the tax system. Can they do it on the face of Lok Sabha election in 2014

 

A day before the budget news is released, the Reserve Bank will announce the results of its latest review of interest-rate policy, which also is likely to have an influence on investor sentiment. But one cannot be sure about RBI's move. Some expect RBI to cut interest rate at this meeting, while others predict RBI will wait for the government to show fiscal prudence in the budget, and for inflation—the central bank's primary concern—to fall further.

 

March is going to be  entirely event-driven & that could cause huge volatility.

 

Remember liquidity can ignore everything. Didn't they ignored the cancellation of cancelling of 122 telecom licenses!