Market to move in a narrow range - Money & You (The Sunday ET)

Entire South East Asia is currently evaluating and emulating relevant lessons from “Thaksinomics” made famous by the ex-Prime Minister of Thailand, Thaksin Shinawatra. His bottom-up approach to economics has gathered widespread appeal across the developing world. Thaksin’s approach — that access to capital, employment opportunities and basic social services can transform disadvantaged regions into growth engines — is now an accepted wisdom.

Chinese President Hu Jintao called for “harmonious growth” when the Chinese National People’s Congress met last March. This week, the Chinese and the Hong Kong press have been speculating that Beijing would soon declare a massive fiscal stimulus package targeting disadvantaged sectors of the economy.

The income disparities and structural flaws are particularly apparent in the fast developing BRIC nations. India, China, Russia and Brazil all suffer from these flaws. A massive oil discovery and investment grade credit ratings fuelled expectations that prosperity for Brazil’s 185 million people was only a matter of time. But a historic neglect of education is a major roadblock in Brazil’s quest to join the big leagues of developed economies.

Many critical structural reforms are still awaited in India and need to be carried out without any further delay to ensure political, economic and social harmony. The proposed pension, commodity market, banking and other financial sector reforms, rural education and development initiatives need to be put on an accelerated growth trajectory. The real task of balanced nation building needs to start without any further delay.

The Indian capital markets last week witnessed sharp movements during the week and ended in positive territory in spite of negative headwinds again coming in from the crude oil basket. On the positive side, headline Inflation numbers during the week turned out to be moderately lower at 12.40 per cent from 12.64 per cent in the previous week. The decline in inflationary levels was primarily driven down by lower prices of non-administered fuel products but Inflation is yet to peak off convincingly which could take another three-six weeks.

Meanwhile, the GDP growth during Q1 2008-09 (Apr-Jun) stood at 7.90 per cent slightly below the consensus expectation of 8.02 per cent; (Q4 2007-08: 8.8 per cent; Q1 2007-08: 9.2 per cent). This is the first time that the GDP growth has slipped below 8 per cent after nine quarters. More importantly high oil prices, and a whopping fertiliser subsidy bill are likely to ensure that the government exceed the fiscal deficit target of 2.5 per cent of the GDP for 2008-09 by a significantly higher margin.

In case oil prices continue to remain high for a much longer period, it would be no surprise that the government would have to take some hard decisions. Also, with the monsoons being only moderately positive till date and not excellent as compared to last year, there is a growing belief that agriculture growth for the coming year may well disappoint and offer little support to the GDP growth this year. Incidentally Q1FY09 farm sector growth stood at 3 per cent versus 4.4 per cent (YoY).

On the global markets front, stronger exports and higher consumer spending supported by the government saw GDP growth in the US growing robustly by 3.3 per cent in Q2 after recording a 0.9% growth in Q1 of current year. Consumer spending, which fuels two-thirds of the US economy, grew at 1.7 per cent with exports growing at 13.2 per cent in this period. In the domestic capital market, expiry of Aug Series in F&O had usual jitters and the series closed indecisively.

However, the start to the Sept series was with a bang on the back of very positive global cues and moderating domestic inflation. Unlike last month, this series has started off on little heavier side with more rollovers on stock futures side.(83 per cent), indicating more action outside index. FIIs continued to remain net sellers through the month of August to the tune of Rs 3,088 crore, thereby indicating cautious approach on the Indian markets.

Volumes still continue to remain low and are clearly indicative of lesser participation from institutional players.
In view of a truncated week and no build-ups on positive or negative side either, the coming week may see a ‘ranged’ and indecisive movement in the index. Action may get shifted to stock-specific trading.

(The writer is CEO, Reliance Money)