Overview of the Markets as on 12th August 2008

In the last fortnight we witnessed the RBI increase the Repo Rate by 50 basis points to 9.0 per cent and the Cash Reserve Ratio (CRR) by 25 basis points which also now stand at 9.0 per cent. Although the market was expecting a rate hike, the magnitude of the hike was greater than anticipated. 

Inflation continued to surge; it touched a 13 year high of 12.01 per cent for the week ended 26^th July. The RBI governor, YV Reddy, stated that inflation might continue to be firm until the end of the current calendar year. It is expected that inflation would peak at the level of 13 – 13.25 per cent. 

Crude oil prices have come down significantly from the peak level of USD 147 per barrel to the current USD 120 per barrel. Prices have come down due to reduction in global consumption and a conscious attack on speculation. 

The result season (Q1FY09) has come to an end with numbers of most of the companies being released. Overall, margins have been mildly impacted due to an increase in the cost of raw materials and higher cost of capital. 

There has been an intermediate rally in stocks recently which has been triggered by factors such as a stable political scenario and a fall in crude oil prices. In the near term, crude oil prices will play an important role in determining market direction. If they range between USD 100 – 120 per barrel then we could see the Sensex touching 16,000 levels. However, if crude starts climbing once again towards the USD 150 per barrel mark, then the Sensex could test 13,000.

In their recent meetings, central banks, including the Federal Reserve, the European Central Bank and the Bank of England, have maintained interest rates steady in an attempt to fine balance inflation and economic growth. On the domestic front too, we might see the rates getting steady; there could just be one last rate hike in the near term. The Indian economy can possibly deliver an economic growth rate of 7.5 – 8 per cent in FY09. 

The market is expected to be range bound in the short term. The Sensex could oscillate in the range of 14,500 – 15,500.