Till Thursday, when figures were available, foreign investors were net buyers on each day, whilst domestic funds were net sellers on each day. The easy money policy followed by the US Federal Reserve to stave off recession, together with the better economic performance of emerging markets like India and China, are leading to a lot of foreign inflows. Domestic investors are making hay whilst the greenbacks shine.
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Our banking regulator, the RBI, is, correctly, following a more prudent monetary policy. Last week it raised the repo rate, at which it lends money to the bank, by 25 basis points (0.25%) to 6%, but stepped on the gas in raising the reverse repo rate, at which it borrows from banks, by 50 basis points, to 5%. Its aim was to suck liquidity out of the system, to contain inflation, which still runs high. The stockmarket was nonchalant.
It looks, therefore, that until foreign inflows pause, either because the US tightens up (unlikely, given its faltering recovery, high joblessness and sluggish housing starts) or in the event of a shock (more likely. For example, each adult Greek is indebted to the extent of $ 250,000 and a default would damage the European banks who lent to Greece). In domestic factors, next Friday's judgement in the Ayodhya dispute may lead to unrest and nervous selling. Especially if there is a sharp rise before it.
The US is also turning protectionist in its bid to create more jobs in America. It had earlier levied a tax on IT companies to fund stricter immigration control. There are now news reports that IT companies are negotiating a 5% increase in rates as a counter. It will ultimately be the US consumer who pays the cost, one way or another.
The India story continues to be good. Indirect tax collections were up 45% in the period April to August and direct tax collections were up 14%. The downside is the wastage of the increased tax resources, such as in the criminally bad way the CWG have been planned. Or in the reluctance of concerned Government agencies to do their jobs and pursue offences. It is thus left to the Supreme Court to issue a notice to Telecom Minister Raja, as allegations about improper allocation of scarce spectrum, causing huge loss of revenue, was not pursued to its conclusion. The additional tax revenue would be a sigh of optimism only if it were spent prudently.
Similarly it is the judiciary that is to decide, next Friday, on the Ayodhya dispute. Politicians are unable to sit down and solve it. One hopes that the judgement will be peacefully accepted by all; but should there be a backlash, investors may get spooked and that could result in a sharp decline.
The EPFO (Employee Provident Fund Organisation) has 'found' some secret reserves, enabling it to hike pension payouts to 9.5%! There is a huge shortfall in the fund, as estimated liabilities are running far higher than the estimated returns, subdued because the funds are invested in debt instruments. The Finance Secretary has been asking them to invest a small part in equity, a growing asset, and some 7 companies have been mandated to manage the amount.
Contrast this with the approach of US pension fund trustees. The California San Bernadino County's Employee Retirement Association has given $30 m. to Passport Capital for management. Now Passport Capital is a hedge fund, which is the riskiest part of the investing spectrum. But the EPFO trustees, were they to consider equity investing, want to put it in triple A rated PSU stocks. Sounds like they seek double protection!
Some other bullish factors are being watered down. One was the spend on road infrastructure. This is likely to run into problems as Mrs Sonia Gandhi has asked for a fair compensation to be paid to those whose lands are acquired for the roads. Which is proper, in a democracy, even though it would temporarily slow down the pace of road building. The more worrying news is the objection, such as by the Kerala Finance Minister, to the introduction of the GST. This introduction, already delayed, was a major bullish factor as it would, by simplifying tax collection, lead to improved efficiency and higher tax collection.
In corporate news Lafarge HP's plans for a Rs 900 crore cement plant in Himachal has run into environmental problems. The Rs 8000 crores follow on public offer of Power Grid Corporation of India is expected to hit the market in November.
The sensex rose 795 points last week to end at 19594 and the Nifty rose 244 points to end at 5884. The sensex is heading to test the high of 21,200 it made in January 08. It could easily do so in the coming week or two. It may be a good idea to get a bit light if there is a blow out in the next week or two.
J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.
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