Commentary from a Newsletter

It was a dream run for the stock markets which gained 878 points in just four trading sessions except on the last day where it lost 22.10 points and settled at 13,285.93. It was a great relief and the rally literally floored most of the market analysts including the fancy foreign ones who come on the TV channels predicting a fall of several thousand points. The recovery was not only in India but it was a global phenomenon. In fact it all started with the melt down in Shanghai where the market fell over 9% .In a sharp and swift manner the Shanghai index recovered the entire looses in the last 16 sessions

FEAR OF RISING INTEREST RATES: At the entrance of every bank there is a huge hoarding offering 9 to 10% interest for fixed deposits as the banks are now literally starved of cash. Some analysts are of the opinion that when the new credit policy comes into force some time in April the RBI may increase the rate of interest further. The RBI governor will now take some lessons from the American counter part. America has realized that increasing the rate of interest by 0.25% has not produced the desired results.

HIKE IN INTERST RATES DID NOT SURVE THE PURPOSE

Since June 2004, In the USA the Fed has increased the rate of interest 17 times. When borrowing rates are high, housing demand falls. And that translates into lower housing prices. Worst is that the Sub-prime borrowers are faced with rising interest rates and falling property prices. Naturally, defaults on such loans have gone up in recent times, forcing many sub-prime mortgage lenders to close shop. That is not all. Mortgage loans in the US are typically bundled off into securities (called mortgage-backed securities) and sold to investors in the market. Defaults on mortgage loans mean losses to these investors..

MARCH ENDING RESULTS WILL BE THE NEXT TRIGER: The next major trigger for the domestic bourses Will be the Q4 March 2007 earnings, reports of which by corporate will start next month. Analysts expect Q4 results to be strong. Market men will closely watch what company managements have to say about the outlook for FY 2008. Most of the big corporate do not borrow from local banks hence they are not affected by an increase in the lending rates. Only the small and medium sized cos have to face hike in the lending rates.

US FED MAY START REDUCING THE RATE OF INTEREST: The US Federal Reserve which often hints of a rate hike has not only did not hike the interest rate but has given indication of a likely hood of a cut in the rate of interest in future. The hike in interest rate alone has not solved the problem of inflation in the USA. It has been noticed that rate hikes in the United States tend to drain cash from the emerging markets into the USA increasing money supply. In fact rate-cuts tend to hike dollar flows into developing economies such as India. In other words the lower interest rates reduce the money supply and control inflation. With the elections around the corner in the USA to have the feel good factor to achieve the American dream the Fed will start reducing the interest rate sooner than expected. If this happens once again money will flow into India from abroad

Market outlook: There will be only for trading sessions this week. It includes the last day of F & O settlement. The mutual funds which have been selling all these days are expected to buy aggressively this week so as to shore up their net asset value (NAV) for the March ending. Hence the markets are expected to be bullish this week.

When the markets declined by 22 points on Friday some of the low to medium priced scrips having land banks and their utility is about to be put to use were in demand. Peerless Abasan after a dream run from Rs.19 to 26.50 has bumped into profit booking. But the land story still remains intact and it should recover shortly from here.