Commentary from a Newsletter

MARKETS TO TURN CHOPPY WITH RBI HIKE: Jesus Christ was crucified on a Friday which will be a holiday for the market. It appears that the bulls will be crucified as early as on Monday itself. Finally the RBI has decided to curtail inflation rather than batting with growth.

RBI after the closing of the market on Friday announced that it was raising repo rate by 25 basis points and would hike the Cash Reserve Ratio (CRR) by 50 basis points in two stages. The central bank has increased the repo rate, a key short-term lending rate, from 7.5% to 7.75% with immediate effect. Every one is expecting a fall of at least 175 to 250 points as it has happened earlier in two occasions when the RBI did the same. This time there will be less panic as every one knows that the markets recover after the initial shocks. Perhaps Bank stocks may take more time to recover.

After all, the measures taken by the RBI is to check inflation which can eat away all the growth a county can have. Other thing is the rate hikes are not permanent features and they can come down once the inflation comes down by say one percent to the permissible level of 5%.It is worth while picking shares at such falls as the recovery too comes up very quickly. Many are still fresh with memories of May 06 when the markets crashed by over 2000 points in just two to three sessions. Some even fear that such a thing may happen again.

Those who take a bearish view of the market place their arguments in the following lines:
Tech stocks in the Sensex: Earnings can get affected on the back of stronger rupee and the MAT Tax imposed in the budget. Infosys guidance during MQ results around 12th April may be not aggressive and this goes for other tech stocks also Infosys is already trading weak. Hence stocks like Infosys, Wipro, Sat yam and TCS will under perform the Sensex.

Cement stocks: Govt is hell-bent on keeping the cement price down. Cement cos will come out with excellent results but investors will avoid these scrips due to Govt. interference. Hence ACC, Ambuja and Grasim will not be contribute to the Sensex

With sales already plunging the auto sectors represented by Maruti and Tata Motors will remain sluggish. Same is the case for Bajaj Auto as well as Hero Honda. Hike in the interest rates are keeping the buyers away. In a bull market it is the auto shares which run up first to indicate the start of a bul market.

The huge amount of money gone into over seas acquisition will keep investors away from Tata Steel as well as HINDALCO.

States are imposing VAT on cigarette and this will affect its margins of ITC further. Already the share is not in the buying list of many.

With Vodafone entry into India changes several equations. At this point of time Reliance Telecom and Bharti Look over priced with lesser chances for further appreciation.

Sensex shares like Dr. Reddy, Ranbaxy, NTPC, ONGC, Hind lever, HDFC, Reliance Energy, and Tata Power are avoided by every one as they have stopped performing for the last one year. 8. These leaves, BHEL, Cipla, HDFC Bank, SBI, Reliance, ICICI Bank, L&T, Bajaj Auto and Hero Honda:

Although these stocks together have a weight age of 32% on the Sensex, bank stocks with the new RBI measures are not likely to rally and support the Sensex. In other words if the Sensex has to climb up it has to be supported by Reliance ONGC and other oil marketing cos. Thus it looks the rally of the Sensex remains curtailed for the time being.

The 2008 budget would be the last one before the next General election and there cannot be any hope of big-ticket announcement till the next elections. GDP growth would also be lower by one percentage point and inflation is still not under check. The crude price has moved up to $ 62.

HOW CORRECT IS THE ABOVE ASSUMPTION? : What is stated above is a logical conclusion arrived by stating what appear to be the facts at that time? When you use logic in the market it does not always work. It can go against your conclusions for the simple reason that the markets are never logical. When we come to certain conclusions as above we take it for granted that the prevailing situation is permanent. In fact the situations are so dynamic they can change any moment

ONE TRIGGER THAT CAN CHANGE THE SCENARIO: What ever may be said finally what changes the market is the liquidity. Current market is cheerless. Even though the FII buy Rs. 50 to 100 Cr on some days they have lost their huge money bags. Last year they used to put in Rs.1000 Cr a day to keep the bears away. This factor is totally missing.
INTEREST RATE CUT IN AMERICA WILL SIGNAL THE NEXT BULL RUN:
Since June 2004, In the USA the Fed has increased the rate of interest 17 times. (RBI has done it here only three times.) In the USA when borrowing rates are high, housing demand falls. And that translates into lower housing prices. Worst is that the borrowers are faced with rising interest rates and falling property prices. For the first time in the USA after 1983 the prices of houses have started falling. Naturally, defaults on such loans have gone up in recent times.
The American Central Bank is now aware of this serious crisis and already hinted that it may consider a rate cut when it meets after a couple of months . If the rate of interest is reduced in America it will ring the alarm bells for many more nations to cut the rate as the interest rates have already gone higher to alarming proportions.
When the rate of interest gets reduced in America the flood gate will be opened for the money from America to enter merging markets like India.