Concern over oil prices

Jan 30, 2012, 06:41 IST | Alex K Mathews

Backed by strong fund inflow and RBI CRR cut, bulls were on a rampage last week, with markets gaining considerably. Nifty was above 5180. Nifty VIX slipped to levels of 20

Backed by strong fund inflow and RBI CRR cut, bulls were on a rampage last week, with markets gaining considerably. Nifty was above 5180. Nifty VIX slipped to levels of 20. Last week was crucial as RBI was meeting for its quarterly review.

Business: Afghan men sell fuel packed in water bottles in Kabul.
A government official said that the border between Iran and
Afghanistan is open and more than 100 fuel tankers have entered
the area since January 23. Pic/AFP

The street consensus was that the RBI would give more importance to liquidity than rate cut to boost economic growth. Infact, the RBI left the interest rates unchanged and reduced the CRR by an unexpected 50 bps to 5.5 per cent. This brought cheer to the markets.

Rate sensitive sectors, especially banking, moved up sharply outperforming the indices as a CRR cut would leave more liquid fund in the hands of the banks to be distributed as loans or to be kept aside for investment. But it is important to note that, for loan demand to pick up, we must see a Repo rate cut, which was hinted by the RBI in its meeting. Hence, we may see rates come down during the next review meeting in March. Nifty has support at 4950 and resistance at 5225. 

The short term Relative Strength Index (RSI) is well above the dangerous zone.  If Nifty manages to close, at least for three days, above 5225 then there could be a further resumption of the uptrend.  But chances are remote.  Investors can sell Nifty futures at around 5225 along with protective long calls of Nifty 5200.  This strategy will reduce the risk to a certain extent.

Food inflation for the week ended January 14 fell to 1.03 per cent against 0.42 per cent in the previous week. The fuel price index climbed an annual 14.45 percent, the same as the week before. Onion prices fell steeply by 79.10 per cent, year-on-year, for the week under review, while potato prices were down 22.46 per cent. Prices of wheat also fell by 3.37 per cent. However, Pulses prices were 12.77 per cent higher, while milk grew dearer by 12.25 per cent.

Eggs, meat and fish prices were up 20.33 per cent year-on-year. Fruits also became 5.17 per cent more expensive on an annual basis, while cereal prices were up 2.71 per cent. What we take from this is that the headline inflation may follow this trend and it may fall towards the RBI comfort zone by March. Even though the exact date is not know, the central government has decided to release the food and fuel inflation data on monthly basis compared to weekly release.

The RBI had said that the government should deregulate diesel prices in order to contain the trade deficit, which is expected to widen to $160 billion during the current fiscal. This is a matter of concern as inflation is showing signs of slowing down and is expected to reach the RBI comfort zone of 5 per cent to 6 per cent.

If the central government deregulates the diesel prices then we may see inflation shooting up once again creating problem for RBI and would pour water on all their efforts to tame inflation and spur growth in the short run. CLSA has upgraded India to overweight from neutral and raised its weightage by two percentage points to 8 per cent in its Asia Pacific ex-Japan relative return portfolio citing recent rupee appreciation versus US dollar improved sentiment towards the euro zone.

Iran tensions are still alive with Iran taking an offensive tone and threatening to terminate oil exports to European nations, even before the embargo comes into effect. If that happens it will have its impact on ailing European nations like Greece and Portugal, which get comparatively cheaper oil from Iran, and are trying hard to fix their holed budgets.

US, which is showing signs of recovery after a series of austerity measures, is going forward by bringing down its defense spending. The Pentagon is facing cuts of $487bn ( �310bn) over the next 10 years. In five years, the Army will drop from a peak of 570,000 to 490,000, and the marines be cut by 20,000, to 182,000. It also wants to limit pay hike for troops, increase health insurance fees for military retirees and close bases in the United States.  Crude is firm and it is likely to test $103.50 in the short term. 

Quarterly number of the mid cap and small cap companies are weak--Rane Break Lining, Kitex Garments, JRG Securities, NHPC, GSFC, Atul and Mafatlal Industries.  Large Cap stocks like BEML, Alstom Power, Sterlite Tech and Ind Hotel also disappointed the investors. Investors with short-term perspective can buy Raymond, Orchid Chem. and Tree House Education.  Short positions are also advisable in HDFC and Dr. Reddy.  Profit booking is expected in front line IT Stocks due to strong rupee.

Alex K Mathews is the author of Financial Services And Systems, as well as Option Trading: Bear Market Strategies published by Tata McGraw Hill. He is also the technical and derivatives research head of Geojit BNP Paribas Financial Services Ltd. The author may have a vested interest in investments he has recommended. Feel free to e-mail him at Geojit BNP Paribas has membership in, and is listed on, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Disclaimer: No financial information whatsoever published anywhere in this newspaper should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is  for
educational and information purposes only and under no circumstances should be used for actual trading or making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment or trading decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at his or her risk.

Go to top