Cues From RBI, US Fed Keenly Watched

As expected, after a brief spell of correction, positive sentiment and momentum is back on Dalal Street, courtesy a measured move by the SEBI.

Will momentum continue in the next few eventful and noisy weeks?

Notwithstanding a veiled threat of a likely strong outflow, sounded by the Managed Funds Association, which proclaims to represent the powerful US hedge fund lobby, and a rather muted expression of uneasiness by the US Treasury Secretary ( Henry M Paulson Jr promised not to air his views on capital flow publicly while in India this week) as also some Wall Street experts, who smelt “protectionism” in the move by the regulator in restricting aggressive usage of P-notes - overnight exodus of money from Indian equities may not happen in the short-term.

Liquidity play

On the other hand, inflow of serious long-term big money is preparing for a direct entry into India without the costly and complicated intermediation by the alternative investment vehicles.

This flow may eventually replace the domination of short-term “hot” liquidity sloshing about Dalal Street now. According to market intelligence, many of the sub-account holders are gearing up for a seamless migration to FII status.

However, it would take 12 to 15 weeks to complete the transformation. Surely, some of the P-note users would find transition difficult to swallow and step back, at least for a while.

But compulsions of maintaining the steady return to their clients may deter a large-scale flight of capital.

Interestingly, the domestic players both institutional and retail, who have largely borne suspicion about the overseas liquidity-driven market momentum since the US Fed cut overnight and discount rates, appear circumspect.

Crossroads

The Q2 results scorecard, which would largely end this week, has so far been on the expected lines of a benign average 20 per cent profit growth, has not dented the optimistic fundamental view for the medium to long-term.

However, responses to the changing business and economic dynamics in the next two quarters would be crucial to growth discounting valuation exercise.

In the words of Andrew Serwer, Managing Editor of Fortune magazine, which is holding its 10th global forum this week in Delhi: “As a potential consumer market, emerging global manufacturing centre, and power house in technology and services, India is on the minds of corporate leaders around the world.”

Short-term clues

While recent experience suggests, the year-end inaction for overseas funds hardly bears any significance for flow taps for domestic equities, this time around investment strategies would be determined by adjustments to the new situation in the next few months.

In the immediate term, signals from the central banks RBI and the US Federal Reserves as also movement of rupee are likely to influence flows.

Mid and small-cap and infrastructure related stocks may prove to be the broad-based flavour of the market going forward.