Lull before the Storm
Hell breaks loose post announcement of increase in repo rates
The markets were fairly quiet for the first three days of last week and then they went crazy. We had a huge gap-up opening after the FED decided to defer the tapering of quantitative easing and keep things unchanged. Friday, it was the turn of our new governor to present his first review of the monetary policy.
Tears for fears: Onions from Egypt have failed to alleviate the crisis
Post the announcement of a 25 basis points increase in repo rates all hell was let loose as markets fell significantly. The week still ended with big gains. The BSE SENSEX gained 530.95 points or 2.69 per cent to close at 20,263.71 points. The NIFTY gained 161.50 points or 2.76 per cent to close at 6012.10 points. The broader indices like the BSE100, BSE200 and BSE500 gained slightly less at 2.80 per cent, 2.66 per cent and 2.45 per cent respectively. The BSEMIDCAP gained a mere 0.45 per cent while the BSESMALLCAP lost 0.44 per cent. The top gainer amongst sectoral indices was BSEBANKEX, which gained 4.99 per cent. The other gainers were BSEFMCG up 4.60 per cent and BSEAUTO up 2.38 per cent. There were just two losers in BSEREALTY down 2.37 per cent and BSEHEALTHCARE down 0.51per cent.
In individual stocks, the biggest gainer was Yes Bank up 26.71per cent. Others included LIC Housing up 12.93per cent, Hind Petro up 11.39 per cent, Maruti Suzuki 10.98 per cent and Bharat Petro up 9.45 per cent. Ranbaxy was a big loser on account of US FDA concerns and lost 27.07 per cent. Other losers included Financial Technologies down 12.60 per cent, Wockhardt Pharma down 10.30 per cent and BHEL down 4.99 per cent.
WPI (Wholesale Price Index) for August rose to 6.10 per cent against 5.79 per cent in the previous month. This is a six-month high. The FED decided to postpone the tapering of Quantitative easing and our markets went ballistic registering their best levels for the year. They left a huge gap while rising over 3 per cent in a day and the same is between 20,013 - 20,347 on the SENSEX and 5,916 - 6,040 on the NIFTY. Friday our new RBI governor Raghuram Rajan or "RR" reviewed the monetary policy. Post the disappointment on the policy almost the entire gains of the gap were retraced with the SENSEX making a low of 20,051 and the NIFTY 5,932. This is a dangerous situation and if the market breaks these levels again we could be in serious trouble.
The Governor voiced his key concern area being high inflation and he raised repo rates by 25 basis points. This caused a slide in the markets. The fact that MSF (Marginal Standing Facility) was reduced by 75 basis points to 9.5per cent was ignored. He also fixed the MSF rate at 200 bps above repo rate and said that it would be his intention to reduce this differential to 100 bps going forward.
The key lesson to be learnt from the sharp volatility is that FII flows decide the markets. While FII's bought aggressively with net purchases at Rs 5,700 crore, with 60 per cent of it coming on Terrific Thursday, domestic institutions were sellers of Rs 1,777 crore. Strong FII inflows helped the rupee as well, which closed at Rs 62.23 a gain of Rs 2.27 or 3.52per cent. One hopes these gains sustain otherwise it could mean big trouble for the country.
Onion prices are as costly as petrol and the possibility of this becoming a political battle when four states go for polls in November and December this year is a big possibility. Indian electorate is price sensitive and onions bring tears to the eyes of one who peels them as well as the Govt. This week sees expiry of the September series futures as well. The previous series expired at a level of 5,409, which means the current level of NIFTY is a good 603 points, or over 11per cent higher. This expiry there could be some pressure on carrying forward as many bulls may not want to roll over positions making over 11per cent returns. If one sees a volatile expiry it may have a downward bias.
The Dow Jones recorded gains of 75 points or 0.49per cent to close at 15,451 points. The cause for concern was the sharp fall of 185 points, which it had on Friday. One needs to see how global markets behave and the trend of FII's in the coming days. On the fundamental front things seem to be bad and virtually not showing any concrete signs of improvement. However foreign inflows from FII's can help correct the current account deficit.
Key levels for the SENSEX are 19,900 and 20,750 while they are 5,875 and 6,125 for the NIFTY. The support for the SENSEX is at 19,984 points, then at 19,660 points, then at 19,357 points and finally at 19,117 points. It has resistance at 20,359 points, then at 20,552 points, then at 20,664 points and finally at 20,803 points. The NIFTY has support at 5,919 points, then at 5,826 points, then at 5,738 points and finally at 5,688 points. It has resistance at 6,040 points, then at 6,117 points, then at 6,170 points and finally at 6,229 points. Another choppy and volatile week is on the cards.
Arun Kejriwal is founder of the Mumbai-based advisory firm Kejriwal Research & Investment Services Pvt Ltd. Readers are invited to read more about these and other issues on his website http://ak57.in
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