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Momentum investors lead the markets

Jun 17, 2000

The foreign investors (FIIs) are shying away from the markets. This is more than evident from the net sales of over Rs 4 bn effected by them this month. On the other hand, another breed of investors has replaced the FIIs as the key buyers in the markets. The momentum investors. After having been preempted by the FIIs, they have returned with a vengeance. In fact, as is apparent from the graph (Momentum investors fuel the rally…) they have contributed, and in no small measure, to the sharp rise in the Sensex during June. FIIs on the other hand were booking profits (they had turned big buyers a couple of days before the rally commenced).

In recent weeks we have been consistently harping on two things that may affect valuations in stock market – inflation and exchange depreciation. The finance minister has recently stated that there is no need for a hike in interest rates. He is also of the opinion that the depreciation of the Rupee is no cause for worry as he feels that inflows will pick up. Soothing talk. But with inflation continuing its upward trend (now with even higher oil prices the situation may worsen) the pressure on the central bank to cool down demand will be intense. Then there is the issue of a large government borrowing programme which to complete would require that higher yields be offered (to maintain real returns). In such a scenario a hike in interest rates seems to be the only answer (though not immediate but surely in the medium term).

In case of the depreciation of the Rupee, the trade account position is likely to worsen on account of the surge both the volume and value of oil imports. The import of crude is likely to jump from 45 million tonnes to 70 million tonnes (Reliance Petroleum went on stream this year), and that to at much higher prices, which are showing no signs of cooling off. Although software exports will cool off the deficit, there will nevertheless be a deficit in the current account. Probably the finance minister is just being optimistic. Or maybe he knows something that the market does not. Let’s hope so!

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