Renewed interest from FIIs fuelling market upswing

In a respite from the trend of the past few months, the key equity indices, Sensex and Nifty, bounced back 1,621 and 500 points respectively, closing the month at 9.10% and 9.38%.
All the same, the Sensex and Nifty posted an annual growth of 10.94% and 11.14% respectively for the financial year ended 2011. This performance placed the
Indian markets in the second quartile among key global performers for the given period.

The present upswing in the market may be attributable to the renewed buying interest
from the FIIs in the derivatives market. The fact that Japanese markets too have begun to show early signs of resurrection from the calamitous aftermath of the earthquake in their home country, has come as some solace for the global financial markets, including India.

The change in the equity market momentum may be attributable to a combination of factors like: indications of easing in the liquidity conditions, mitigation of the price rally in crude oil, emergence of the attractive valuation at select equity counters and short covering by the investors.

Having said that, the political uncertainty and the extended risk of inflation from sudden spike in the crude oil levels continues to remain a key downside risk to the domestic and global economy.

This potential inflationary pressure may cause further rate tightening in the key interest rates, and may also weigh down on the GDP growth in future. All the more, a far more pertinent issue may also be the likely increase in the fiscal expenditure, which may overshoot due to higher oil price subsidy bill in the coming period.

Indian equity market has consequently been playing out largely in a broad range, with intermittent bouts of high volatility emanating from time to time. It is expected that the resurgence of growth in the developed markets may moderate the FII inflows; albeit, India would still remain a key investment destination amongst the emerging markets.

On the debt market side, the extended inflationary pressure in the food prices, and the upswing in the crude oil prices, remains a key cause of concern for the market participants. In that context, the 25 bps rate hike in the repo and the reverse repo by the RBI on 17th March 2011 may only be the first among the coming series of upward re-assessments.

Moreover, even the US gilt yields have risen, possibly indicating the end of the US fed liquidity support to the market. The money market rates too surged in the last fortnight of March as heavy advance tax outflow caused a squeeze on the market liquidity.

Going forward, the liquidity conditions are expected to improve since the supply outlook seems relatively benign, while the government spending too is expected to pick pace in the weeks ahead. Alongside, the likely introduction of a new 10-year benchmark paper may also contribute in trending down the benchmark yields in the times ahead.

On the mutual funds perspective, the average AUM of the industry in the Jan-Mar 2011 quarter has expanded by 3.2%. This growth in the industry AUM, especially during the period of liquidity squeeze, may be indicative that the investment flows are of a more durable nature. We remain optimistic that this growth rate would expand further as the FII inflows pick pace, and the impact of the systemic events phase-out.

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