• JUNE 16, 2000

What's suppressing market sentiment?

The markets have been trading in a narrow range ever since the sharp 700 point rally, which saw the market rise from sub 4,000 levels to 4,700. What's holding the markets at its existing levels?

After the sharp rally, the bullish sentiment in stock markets has turned to skepticism. This is largely due to three reasons. First, and most important, is inflation. In recent months inflation has been rising at unprecedented rates sparking fears that the central bank may have to reverse its easy credit policy. Moreover as the inflation numbers reveal, it is the primary articles and the fuels group that have contributed in a large manner to the rise in inflation. The manufacturing sector (which has witnessed a relatively lower rise in prices) is, as a whole, therefore, witnessing cost escalation. This will hurt corporate profitability.

The second factor is the depreciation in the value of Rupee. Although beneficial to net exporters, the move will dent investment activity in the country as a significant part of capital goods requirement is still met from imports. Moreover companies that use imported raw materials will be adversely affected. Then there is the issue about the government's external debt of US$ 97 bn. The depreciation in value of the Rupee will lead to a rise in servicing costs, thus putting further pressure on fiscal resources (as pointed out earlier, a 3% depreciation will add Rs 11 bn to the external debt servicing burden in FY01).

Last is the realization that announcement of a normal monsoon does not mean that the drought situation in concerned states has been taken care of. As pointed out earlier, demand growth will take time to revive to earlier levels. Therefore the price realizations and sales volumes (for commodities and products) in these states may continue disappoint for some more time before the economy in these states picks up pace. For example in case of cement, volume growth has come to a standstill (in the concerned states) and prices have crashed.

The above three fundamental issues seem to be finally weighing on market sentiment.

Where the markets will head in the medium term is likely to depend on the developments pertaining to the three issues mentioned above. And of course, in the near term, Indian markets will continue to track the NASDAQ (by the way, the NASDAQ too seems to have stagnated in recent days)!

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